« AnteriorContinuar »
The Commission held that under the circumstances Gintel's conduct operated as a fraud and deceit upon the purchasers from his customers' accounts and constituted a willful violation of the antifraud provisions of the securities acts. It found that Gintel had the responsibility of an "insider” to disclose material facts which were known to him by virtue of his position but which were not known to persons with whom he dealt and which, if known, would have affected their investment judgment. The Commission said that the director of Curtiss-Wright who had informed Cady, Roberts of the dividend cut would have been prohibited from selling the securities without disclosure, and that by logical sequence Gintel, a partner of registrant, was also prohibited from selling without disclosure. Gintel argued that his sales after receiving news of the dividend action were part of a continuing program of liquidating the Curtiss-Wright holdings in his discretionary accounts and that he was carrying out a fiduciary responsibility to his customers. The Commission rejected these arguments. It found that Gintel's sales after receiving the news were in contrast to his previous moderate rate of sales of CurtissWright stock, and that he allocated short sales to his wife's account and to the account of a customer with whom he had had no prior dealings. The Commission ruled that although Gintel occupied a fiduciary relationship to his customers, that relationship could not justify his use of inside information at the expense of the general public. With respect to the argument that a disclosure requirement applicable to exchange transactions would present substantial practical difficulties, the Commission stated that such problems are easily avoided where, as here, all the registered broker-dealer need do is to keep out of the market until the established procedures for public release of the information on the exchange are carried out. The Commission took no action against the registrant because it found that there was no evidence of a preconceived plan to “leak” the advance information, that Gintel had acted spontaneously, and that registrant had had no opportunity to prevent the transactions. Net Capital Rule
The basic purpose of Rule 15c3-1, promulgated by the Commission under Section 15(c)(3) of the Exchange Act, is to safeguard funds and securities of customers dealing with registered broker-dealers. This rule, commonly known as the net capital rule, limits the amount of indebtedness which may be incurred by a broker-dealer in relation to its capital. It provides that the "aggregate indebtedness” of a broker-dealer may not exceed 20 times the amount of its “net capital” as computed under the rule.
If it appears from an examination of the reports filed by a registered broker-dealer with the Commission, or through inspection of its books and records, that the ratio is exceeded, the Commission normally notifies the broker-dealer of the deficiency and affords an opportunity for compliance. Unless the capital situation is promptly remedied, injunctive action may be taken by the Commission and in addition proceedings may be instituted to revoke the broker-dealer's registration. During the past fiscal year, violations of the net capital rule were charged in 25 injunctive actions and in 23 revocation proceedings instituted against broker-dealers.
Registered broker-dealers who participate in "firm commitment” underwritings must have sufficient capital to permit the participation provided by the underwriting contract without impairing the capitaldebt ratio prescribed by the rule. For the protection of issuers and customers of the broker-dealer, the Commission's staff carefully analyzes the latest available information on the capital position of the participants to determine whether they will be in compliance with the rule upon assumption of the new obligations involved in the underwritings. Acceleration of the effective date of registration statements filed under the Securities Act will be denied where underwriting commitments may engender violations of the net capital rule by any participating underwriter. A participant found to be inadequately capitalized to take down his commitment is notified and given an opportunity to adjust his financial position to meet the requirements of the rule without reducing his commitments. If he is unable to meet such requirements, he must decrease his "firm commitment" until compliance with the rule is reached. If necessary he may have to withdraw from the underwriting or participate on a “best efforts” basis only. Financial Statements
Rule 17a-5 under Section 17(a) of the Exchange Act requires registered broker-dealers to file annual reports of financial condition with the Commission. Such reports must be certified by a certified public accountant or public accountant who is in fact independent, with certain specified limited exemptions applicable to situations where certification does not appear necessary for customer protection. Under certain circumstances member firms of national securities exchanges are exempt from the necessity of certification and an exemption is available for a broker-dealer who, since his previous report, has limited his securities business to soliciting subscriptions as an agent for issuers, has transmitted funds and securities promptly, and has not otherwise held funds or securities for or owed monies or securities to customers. Also exempt is a broker or dealer who, from the date of
his last report, has confined his business to buying and selling evidences of indebtedness secured by liens on real estate and has carried no margin accounts, credit balances or securities for any customers.
After his registration, a broker-dealer's first financial report must reflect his condition as of a date between the end of the 1st and 5th months after the effecive date of the registration. All reports must be filed within 45 days after the date as of which the report speaks.
Through these reports the Commission and the public may evaluate the financial position and responsibility of broker-dealers. The financial report is one means by which the staff of the Commission determines whether the registrant is in compliance with the net capital rule. Failure to file the required reports may result in the institution of revocation proceedings. However, it is the policy of the Commission first to advise the broker-dealer of his obligations under the rule and to give him an opportunity to file the report.
During the fiscal year 5,228 reports of financial condition were filed with the Commission compared to the 1961 total of 5,060. Broker-Dealer Inspections
Section 17(a) of the Exchange Act provides for regular and periodic inspections of registered broker-dealers. During the fiscal year the number of such inspections totaled 1,515. The inspection device is a most useful instrument in protecting investors and detecting violations of the Federal securities laws. The inspection, among other things, determines a broker-dealer's financial condition, reviews his pricing practices, evaluates the safeguards employed in handling customers' funds and securities, and determines whether adequate and accurate disclosures are made to customers.
The Commission's inspectors also determine whether brokers and dealers are keeping books and records as required by the Exchange Act and the Commission's rules thereunder and conforming to the margin and other requirements of Regulation T of the Federal Reserve Board. Inspectors also look for excessive trading or switching in customers' accounts. Inspectors frequently find evidence of the sale of unregistered securities or of fraudulent practices such as use of improper sales literature or sales techniques.
When inspections reveal that a broker-dealer is violating the statutes or rules, consideration is given to the type of violation and the effect on the public. The Commission does not take formal action as a result of every infraction discovered. Inspections frequently reveal inadvertent violations which are discovered before becoming serious and before customers' funds or securities are in danger. When no harm has come to the investing public the registrant is informed of the violations and advised to correct the improper practices. If the violation appears to be willful and the public interest is best served by formal action against the broker-dealer, the Commission will institute appropriate proceedings.
The table below shows the types of infractions uncovered by the inspection program during the fiscal year: Type
Number of brokers Financial difficulties--
204 Hypothecation rules_
15 Unreasonable prices in securities purchases and sales
188 Regulation T of the Federal Reserve Board.
181 "Secret profit"-
6 Confirmation and bookkeeping rules-
Total indicated violations...
1, 798 The National Association of Securities Dealers, Inc., and the principal stock exchanges also conduct inspections of their members, and some states have inspection programs. Each inspecting agency conducts inspections in accordance with its own procedures and with particular reference to its own regulations and jurisdiction. Consequently, inspections by other agencies are not adequate substitutes for Commission inspections since they are not primarily concerned with the detection of violations of the Federal securities laws and the Commission's regulations. These other inspection programs, however, do afford added protection to the public. The Commission and certain other inspecting agencies coordinate their inspections to avoid duplication and to obtain the widest possible coverage of brokers and dealers. This program, however, does not prevent the Commission from inspecting any broker-dealer that has also been inspected by another agency, and such inspections are made whenever reason therefor exists. Agencies now participating in this coordination program include the New York Stock Exchange, the American Stock Exchange, the Boston Stock Exchange, the Midwest Stock Exchange, the Pacific Coast Stock Exchange, the Philadelphia-Baltimore Stock Exchange, the Pittsburgh Stock Exchange, and the National Associa tion of Securities Dealers, Inc.
SUPERVISION OF ACTIVITIES OF NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.
Section 15A of the Securities Exchange Act of 1934, known as the Maloney Act, provides for the registration with the Commission of national securities associations and establishes standards for such associations. The rules of such associations must be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and practices and to meet other statutory requirements. Such associations are essentially disciplinary in purpose and serve as a medium for the cooperative self-regulation of over-thecounter brokers and dealers. They operate under the general supervision of this Commission which is authorized to review disciplinary actions and decisions which affect the membership of members, or of applicants for membership, and to consider all changes in their rules. The National Association of Securities Dealers, Inc. (NASD), is the only Association registered under the Act.
In adopting legislation permitting the formation and registration of such associations, Congress provided an incentive to membership by permitting such associations to adopt rules which preclude a member from dealing with a nonmember, except on the same terms and conditions as the member affords the investing public. The NASD has adopted such rules. Accordingly, membership is necessary to the profitable participation in underwritings and over-the-counter trading since members may properly grant price concessions, discounts and similar allowances only to other members. Loss or denial of membership due to expulsion or suspension or other ineligibility due to a statutory disqualification, or to failure to meet standards of qualification established in NASD rules, thus imposes a severe economic sanction.
Membership in the NASD reached an all time month-end high of 4,925 at June 30, 1962. During the year net membership increased by 314, as a result of 721 admissions to and 407 terminations of membership. At the same time there were registered with the NASD as registered representatives 102,405 individuals, also an all time monthend high, including generally all partners, officers, traders, salesmen, and other persons employed by or affiliated with member firms in capacities which involved their doing business directly with the public. The number of registered representatives increased by 8,365 during the year as a result of 25,510 initial registrations, 15,014 reregistrations and 32,159 terminations of registrations. NASD Disciplinary Actions
The Commission receives from the NASD summaries of decisions in all disciplinary actions against members. Each such action must be based on allegations that a member has violated specified provisions of the NASD Rules of Fair Practice, although registered representatives of members and persons controlling or controlled by members may also be cited for having been the cause of a violation.
Where violations are found one or more of the available sanctions may be imposed. These include expulsion or suspension from membership, revocation or suspension of registration as a registered rep