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Subsequent to the end of the fiscal year, the Commission adopted the amendments and the new rule.24
Adoption of Exemptive Rules Applicable to Licensed Small Business Investment
Companies In the fiscal year, the Commission adopted rules and a related form applicable to small business investment companies licensed by the Small Business Administration, to provide exemptions from certain requirements of Sections 17(a), 17(d), and 18(c) of the Investment Company Act.25 Rule 17a-6 exempts from the prohibitions of Sections 17(a)(1) and 17(a) (3) of the Act, subject to certain conditions, loans and other securities transactions which would be prohibited by those Sections solely because an SBIC owns, holds, or controls with power to vote the voting securities of a small business concern. At the same time the Commission adopted, pursuant to Section 17(d) of the Act, an amendment to Rule 17d-1 which exempts from that rule's requirements certain transactions where banks and an affiliated SBIC make investments in the same small business concern, and a new Rule 17d-2 which prescribes a related reporting Form N-17D-1. The Commission has adopted a new Rule 18c-1 which exempts a small business investment company from the requirements of Section 18(c) so as to permit it to issue more than one class of senior security representing indebtedness so long as all such indebtedness is privately held and the company does not have outstanding any publicly held indebtedness.
THE INVESTMENT ADVISERS ACT OF 1940 Adoption of Rules 206(4)-1 and 206(4)-2
Section 206(4) of the Investment Advisers Act, which was enacted in September 1960, prohibits an investment adviser from engaging in any act, practice, or course of business which is fraudulent, deceptive, or manipulative, and gives the Commission the power by rules and regulations to define and prescribe means reasonably designed to prevent such acts, practices, and courses of business.
The Commission during the fiscal year adopted Rule 206(4)-1, effective January 1, 1962, defining certain advertisements by investment advisers to be fraudulent, deceptive, or manipulative within the meaning of Section 206(4) of the Act.26 The rule is intended to implement the statutory mandate by foreclosing the use of advertisements which have a tendency to mislead or deceive clients or prospective clients.
24 Investment Company Act Release No. 3578 (November 28, 1962). 2 Investment Company Act Release No. 3361 (November 17, 1961). % Investment Advisers Act Release No. 121 (Nov. 2, 1961).
The rule prohibits advertisements which contain testimonials or which call attention to specific past recommendations made by the investment advisers which would have been profitable. Other provisions of the rule specify the circumstances under which advertisements offering graphs, charts, formulas, or other devices may be used, and prohibit advertisements which represent that any report, analysis, or other service can be obtained free or without charge unless it is entirely free and subject to no conditions or obligations. The rule also includes a general prohibition against the use of advertisements containing untrue or misleading statements.
The Commission also adopted Rule 206(4)-2, effective April 2, 1962.27 The new rule is designed to implement the provisions of Section 206(4) of the Act, by requiring an investment adviser who has custody of funds or securities of any client to maintain them in such a way that they will not be jeopardized by financial reverses of the investment adviser.
The rule makes it a fraudulent, deceptive or manipulative act, practice or course of business for any investment adviser who has custody or possession of funds or securities of clients to take any action with respect to any such funds or securities unless (1) the securities of each client are segregated, and held in safekeeping in a reasonably safe place; (2) clients' funds are deposited in bank accounts which contain only such funds, maintained in the name of the investment adviser as agent or trustee, and the latter maintains a separate record for each such account containing specified information; (3) the adviser, immediately after accepting custody or possession, notifies the client in writing of the place and manner in which the funds and securities will be maintained; and (4) the adviser sends each client, at least once every 3 months, an itemized statement of the funds and securities in his custody or possession and of all transactions in the client's account; and (5) at least once each calendar year the funds and securities are verified by an independent public accountant in a surprise examination and his certificate is sent to the Commission promptly thereafter.
Since certain members of national securities exchanges and registered broker-dealers must maintain specified standards of financial responsibility under the Commission's Rule 15c3-1 under the Securities Exchange Act, or applicable rules of the exchanges of which they are members, Rule 206(4)-2 exempts from its requirements registered broker-dealers subject to and in compliance with Rule 15c3-1, and members of exchanges whose members are exempt from Rule 15c3-1, and who are in compliance with exchange requirements with respect
37 Investment Advisers Act Release No. 123 (Feb. 27, 1962).
to financial responsibility and the segregation of customers' funds or securities. Proposed Amendment to Rule 204–2
During the fiscal year the Commission invited public comment on a proposed amendment to Rule 204–2, which would require investment advisers to maintain records containing specified information concerning securities transactions in which they or their key personnel have any beneficial interest.28 The proposed amendment, which is designed to prevent fraudulent, deceptive and manipulative acts and practices, was pending at the end of the fiscal year.
Investment Advisers Act Release No. 120 (October 16, 1961).
ADMINISTRATION OF THE SECURITIES ACT OF 1933
The Securities Act of 1933 is designed to provide disclosure to investors of material facts concerning securities publicly offered for sale by the use of the mails or instrumentalities of interstate commerce, and to prevent misrepresentation, deceit, or other fraudulent practices in the sale of securities. Disclosure is obtained by requiring the issuer of such securities to file with the Commission a registration statement which includes a prospectus containing significant financial and other information about the issuer and the offering. The registration statement is available for public inspection as soon as it is filed. Although the securities may be offered after the registration statement is filed, sales may not be made until the registration statement has become "effective.” A copy of the prospectus must be furnished to each purchaser at or before the sale or delivery of the security. The registrant and the underwriter are responsible for the contents of the registration statement. The Commission has no authority to control the nature or quality of a security to be offered for public sale or to pass upon its merits or the terms of its distribution. Its action in permitting a registration statement to become effective does not constitute approval of the securities, and any representation to a prospective purchaser of securities to the contrary is made unlawful by Section 23 of the Act.
DESCRIPTION OF THE REGISTRATION PROCESS Registration Statement and Prospectus
Registration of securities under the Act is effected by filing with the Commission a registration statement on the applicable form containing the prescribed disclosure. When a registration statement relates, generally speaking, to a security issued by a corporation or other private issuer, it must contain the information, and be accompanied by the documents, specified in Schedule A of the Act; when it relates to a security issued by a foreign government, the material specified in Schedule B must be supplied. Both schedules specify in considerable detail the information which should be made available to an investor in order that he may make an informed decision whether
to buy the security. In addition, the Act provides flexibility in its administration by empowering the Commission to classify issues, issuers, and prospectuses, to prescribe appropriate forms, and to increase, or in certain instances vary or diminish, the particular items of information required to be disclosed in the registration statement, as the Commission deems appropriate in the public interest or for the protection of investors.
In general, the registration statement of an issuer other than a foreign government must describe such matters as the names of persons who participate in the direction, management, or control of the issuer's business; their security holdings and remuneration and the options or bonus and profitsharing privileges allotted to them; the character and size of the business enterprise, its capital structure, past history and earnings, and its financial statements, certified by independent accountants; underwriters' commissions; payments to promoters made within 2 years or intended to be made; the interest of directors, officers, and principal stockholders in material transactions; pending or threatened legal proceedings; and the purpose to which the proceeds of the offering are to be applied. The prospectus constitutes a part of the registration statement and presents the more important of the required disclosures. Examination Procedure
The staff of the Division of Corporation Finance examines registration statements for compliance with the standards of accurate and full disclosure and usually notifies the registrant by an informal letter of comment of any material respects in which the statement appears to fail to conform to those requirements. The registrant is thus ordinarily afforded an opportunity to file a curative amendment. In addition, the Commission has power, after notice and opportunity for hearing, to issue an order suspending the effectiveness of a registration statement. In certain cases, for example where a registration statement is so deficient as to indicate a willful or negligent failure to make adequate disclosure, no letter of comment is sent and the Commission either institutes an investigation to determine whether stop order proceedings should be instituted or immediately institutes stop order proceedings. Information about the use of this stop-order power during 1962 appears below under "Stop Order Proceedings." Time Required to Complete Registration
Because prompt examination of a registration statement is important to industry, the Commission endeavors to complete its analysis in as short a time as possible. The Act provides that a registration statement shall become effective on the 20th day after it is filed. How