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Manuel F. Cohen

Commissioner Cohen was born in Brooklyn, N.Y., on October 9, 1912. He holds a B.S. degree in social science from Brooklyn College of the College of the City of New York. He received an LL.B. degree, cum laude, from Brooklyn Law School of St. Lawrence University in 1936, and was elected to the Philonomic Council. He is a member of the New York bar. In 1933-1934 he served as research associate in the Twentieth Century Fund studies of the securities markets. He joined the Commission Staff as an attorney in 1942 after several years in private practice, serving first in the Investment Company Division and later in the Division of Corporation Finance, of which he was made Chief Counsel in 1953. He was named Adviser to the Commission in 1959 and in 1960 became Director of the Division of Corporation Finance. He was awarded a Rockefeller Public Service Award by the trustees of Princeton University in 1956 and for a period of 1 year studied the capital markets and the processes of capital formation and of government and other controls in the principal financial centers of Western Europe. In 1961 he was appointed a member of the Council of the Administrative Conference of the United States and received a Career Service Award of the National Civil Service League. From 1958 to 1962 he was lecturer in Securities Law and Regulation at the Law School of George Washington University and he is the author of a number of articles on securities regulation published in domestic and foreign professional journals. In 1962, he received an honorary LL.D. degree from Brooklyn Law School. He took office as a member of the Commission on October 11, 1961, for the term expiring June 5, 1963.

Jack M. Whitney II

Commissioner Whitney was born in Huntington Beach, Calif., on May 16, 1922. He attended Millsaps College in Jackson, Miss., for 2 years, and Northwestern University School of Commerce, from which he received a B.S. degree in 1943. From 1943 to 1946 he was on active duty in the U.S. Naval Reserve, achieving the rank of Lieutenant (junior grade) in the Supply Corps. He was graduated from Northwestern University School of Law in 1949 with the degree of J.D. In law school he was an editor of the law review, and he is a member of Beta Gamma Sigma and Order of the Coif. Following graduation he became associated with the Chicago law firm of Bell, Boyd, Marshall & Lloyd, of which he was a member at the time of his appointment to the Commission. His practice was primarily in the field of corporate finance. He took office as a member of the Commission on November 9, 1961, for the term ending June 5, 1964.

CURRENT PROBLEMS BEFORE THE COMMISSION

Foreword

Fiscal year 1962 witnessed extraordinary activity in all aspects of the Commission's responsibilities. The peaks reached during fiscal 1961 in the flotation of new issues of securities, in broker-dealers and investment advisers registered with the Commission, and in the number of customers men employed and branch offices maintained by securities firms were equalled or exceeded.

ualled or exceeded. The sustained high level of activity and the wide public participation in the securities markets continued to attract untrained salesmen as well as those who seek to take advantage of greater interest in investment by new and inexperienced investors. These factors compelled increased vigilance in regulatory matters and more vigorous enforcement effort by the Commission and by the self-regulatory agencies of the securities industry.

During the year the Commission adopted a number of significant statements of policy and rules. At the end of the fiscal year other rules which had been published for public consideration were under study in the light of the comments received. The number of enforcement actions taken-civil, criminal and administrative-continued to rise.

Apart from the problems arising in the course of the regular activities of the Commission, fiscal 1962 saw the commencement of the Commission's Special Study of Securities Markets, the first comprehensive study of the securities markets in more than 25 years. A sharp break in securities prices toward the end of the fiscal year has also required an examination in depth of the events which preceded and accompanied this dramatic price decline as well as the performance of important market mechanisms and those professionally responsible for their operation.

During the fiscal year, the Commission also received a report of a study of certain facets of open-end (mutual) investment company operations conducted for the Commission by the Wharton School of Finance and Commerce, University of Pennsylvania. This is the first detailed study made of an increasingly important investment medium since the Commission's studies which preceded passage of the Investment Company Act of 1940.

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In the paragraphs and chapters which follow we refer in somewhat greater detail to these and other matters which received the attention of the Commission and its staff in fiscal 1962.

Special Study of Securities Markets

The Study was authorized by Public Law 87–196, enacted early in September 1961, which directed the Commission to make a study and investigation of the adequacy, for the protection of investors, of the rules of stock exchanges and national securities associations and to report to the Congress, on or before January 3, 1963, the results of its study together with its recommendations. Following organization of the Study unit and preliminary analysis of the topics to be investigated, it became apparent that the thorough examination and reassessment of the securities markets which were contemplated by the Congress could be completed only if the reporting date were extended. Public Law 87-561 extended the Study to April 3, 1963.

The Study, as the Congress intended, is extremely broad in scope. The effectiveness of industry self-regulation through the stock exchanges and the National Association of Securities Dealers, Inc. is undergoing thorough examination. Intensive inquiries are being conducted into the rules and practices of the stock exchanges, including those relating to the role of specialists, floor traders and odd-lot dealers.

The structure of the over-the-counter market and the adequacy of its regulation, such as controls over quotations systems, are the subject of a detailed review. Information is also being gathered regarding the character of issuers whose securities are traded in that market. Under existing law, a large number of these issuers in whose securities there is a substantial public interest are not subject to any of the reporting or other regulatory requirements imposed on companies whose securities are listed on an exchange. On the basis of the information gathered, the Commission expects to determine the appropriateness of existing distinctions in the regulation of these two categories of issuers.

The Study is also conducting an investigation into the process by which corporations distribute their securities to the public, and into the over-the-counter trading in these securities after distribution, including the problem of so-called “hot issues.” Other major subjects of scrutiny include the adequacy of the existing pattern of securities credit regulation and any gaps and inconsistencies with respect to the types of lenders and securities covered; the techniques and uses of financial publicity; standards of entrance into the securities business; and sales practices, including those relating to mutual funds. Substantial progress has been made in gathering information in all these

areas, through questionnaires, interviews and public hearings, and in analyzing such information.

It is anticipated that upon completion of the Study, the present regular staff of the Commission, and additional personnel from the Study, will be assigned the task of implementing the findings and recommendations made.

The Commission believes that the Study has already had a beneficial effect by stimulating significant developments in the form of rule changes, the establishment of internal control procedures and new or improved testing and training programs by broker-dealers, and vigorous disciplinary actions by the self-regulatory agencies of the industry. These steps reflect an increased awareness by the financial community of its responsibilities and have assisted in establishing a more salutary climate in the securities markets. The most dramatic illustration of this new climate is the reorganization of the American Stock Exchange. An investigation of that Exchange, which had commenced prior to the authorization of the Study, was completed with the participation of personnel from the Study, and a report was issued on January 6, 1962. The report concluded, on the basis of detailed findings, that in the case of that Exchange the statutory scheme of self-regulation had not worked in the manner envisioned by Congress. Since that time, substantial changes have occurred in the staff, organization and constitutional structure of the Exchange. This reorganization was effected by the Exchange itself, consistent with the Commission's belief that self-regulation could be revitalized on a realistic basis. The Commission maintained close coordination with the Exchange throughout the process of reorganization. The Wharton School Study of Investment Companies

As reported previously, the Commission engaged the Wharton School of the University of Pennsylvania to conduct a fact-finding study of the problems created by the growth in size of investment companies. Shortly after the close of fiscal year 1962, the study was completed and was transmitted to the Commission which in turn submitted it to the Committee on Interstate and Foreign Commerce, House of Representatives. The study constitutes the most comprehensive analysis of the mutual fund industry since the Commission's study made more than 20 years ago, prior to the adoption of the Investment Company Act of 1940. It analyzes the growth, organization and control, investment policy, and performance of open-end investment companies or mutual funds, their impact on securities markets, the extent of control of portfolio companies, and the financial and other relationships of mutual funds with their investment advisers and principal underwriters.

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