ADMINISTRATION OF THE TRUST INDENTURE ACT OF 1939 The Trust Indenture Act of 1939 requires that bonds, notes, debentures and similar securities publicly offered for sale, except as specifically exempted by the Act, be issued under an indenture which meets the requirements of the Act and has been duly qualified with the Commission. The Act requires that indentures to be qualified include specified provisions which provide means by which the rights of holders of securities issued under such indentures may be protected and enforced. These provisions relate to designated standards of eligibility and qualification of the corporate trustee to provide reasonable financial responsibility and to minimize conflicting interests. The Act outlaws exculpatory provisions formerly used to eliminate all liability of the indenture trustee and imposes on the trustee, after default, the duty to use the same degree of care and skill "in the exercise of the rights and powers invested in it by the indenture" as a prudent man would use in the conduct of his own affairs.

The provisions of the Trust Indenture Act are closely integrated with the requirements of the Securities Act. Registration pursuant to the Securities Act of securities to be issued under a trust indenture subject to the Trust Indenture Act is not permitted to become effective unless the indenture conforms to the requirements of the latter Act, and necessary information as to the trustee and the indenture must be contained in the registration statement. In the case of securities issued in exchange for other securities of the same issuer and securities issued under a plan approved by a court or other proper authority which, although exempted from the registration requirements of the Securities Act, are not exempted from the requirements of the Trust Indenture Act, the obligor must file an application for the qualification of the indenture, including a statement of the required information concerning the eligibility and qualification of the trustee.

Indentures filed under the Trust Indenture Act of 1939 during the fiscal year ended

June 30, 1963

ADMINISTRATION OF THE INVESTMENT COMPANY ACT OF 1940

The Investment Company Act of 1940 provides for the registration and regulation of companies primarily engaged in the business of investing, reinvesting, owning, holding, or trading in securities. The Act, among other things, requires disclosure of the finances and investment policies of such companies, prohibits changing the nature of their business or their investment policies without shareholder approval, regulates the means of custody of the companies' assets, requires management contracts to be submitted to security holders for approval, prohibits underwriters, investment bankers, and brokers from constituting more than a minority of the directors of such companies, and prohibits transactions between such companies and their officers, directors, and affiliates except with approval of the Commission. The Act also regulates the issuance of senior securities and requires faceamount certificate companies to maintain reserves adequate to meet maturity payments upon their certificates.

The securities of investment companies which are offered to the public are also required to be registered under the Securities Act of 1933 and the companies must file periodic reports. Such companies are also subject to the Commission's proxy rules and closed-end companies are subject to "insider" trading rules. The Division of Corporation Finance and the Division of Corporate Regulation both assist the Commission in the administration of the statute, the former being concerned with the disclosure provisions and the latter with regulatory provisions.

COMPANIES REGISTERED UNDER THE ACT

As of June 30, 1963, there were 727 investment companies registered under the Act, including 71 small business investment companies, and the estimated aggregate market value of their assets on that date was approximately $36 billion. Compared with the corresponding totals at June 30, 1962, these figures represent an overall increase of approximately $8.7 billion in the market value of assets while the number of registered companies remained the same. The registered companies were classified as follows:

During the fiscal year, 48 new companies, including 4 small business investment companies, registered under the Act while the registrations of 48 companies, including 11 small business investment companies, were terminated. The classification of these companies is as follows:

GROWTH OF INVESTMENT COMPANY ASSETS

The following table illustrates the striking growth of assets of investment companies over the years since the enactment of the Investment Company Act:

Number of investment companies registered under the Investment Company Act and their estimated aggregate assets at the end of each fiscal year, 1941 through 1963

The increase in aggregate assets reflects the sale of new securities as well as capital appreciation. By way of illustration, the Investment Company Institute reported that during the fiscal year ended June 30, 1963, its open-end investment company members, numbering 169 and representing the bulk of the industry, had net sales of their securities amounting to $951 million.

INSPECTION AND INVESTIGATION PROGRAM

Pursuant to the statutory authority conferred by Section 31(b) of the Investment Company Act, a total of 84 inspections of investment companies was completed during fiscal year 1963. The number of inspections compares favorably with the total of 165 inspections that had been conducted in all prior years since the inception of the program in 1957 and with the 52 inspections in fiscal 1962. These inspections were planned and supervised by a Branch of Inspections and Investigations which was newly created for such purpose in the Division of Corporate Regulation.

As part of the Commission's expanding program in this area, Investment Company Act training seminars for staff members in the regional offices were conducted for the first time, with a total of some 75 participants. The object of the seminars was to train personnel in the teachnical aspects of inspection of investment companies and to coordinate the activities of the various regional offices in regard to the inspection and enforcement program.

In a majority of the inspections conducted during the fiscal year, violations of various provisions of the Investment Company Act, as well as violations of other statutes administered by the Commission, were brought to light. While many of the violations thus uncovered were of a minor nature and, when called to the attention of those involved, were corrected or discontinued, serious violations have also been discovered. Instances were discovered in which investment advisory contracts had not been entered into or continued in accordance with provisions of Section 15 of the Act with the consequence that the investment adviser was collecting fees based upon a void contract. In one such instance, the board of directors had failed to renew the advisory contract as required by Section 15 (c). In another instance, the inspection and resulting investigation developed information indicating that certain directors were acting as investment advisers to the investment company in violation of Section 15 (a). The inspection of investment companies has also disclosed in several instances violations of Section 17 by persons affiliated with the investment companies. During the fiscal year, the responsibility for conducting investigations in matters involving violations of the Investment Company Act was transferred to the Division of Corporate Regulation from the Division of Trading and Exchanges now Trading and Markets). A total of 29 investigations was commenced during the year through the Branch of Inspections and Investigations, chiefly as a result of information gained during the course of the inspection program.

As a consequence of the inspection and investigation program, situations were brought to light warranting the institution of civil actions

by the Commission in nine separate matters. Of the nine actions, one has been concluded with the entry of a consent decree and the appointment of receivers to liquidate the company. In another action, S.E.C. v. The Keller Corporation et al.,2 a preliminary injunction was entered December 20, 1962, enjoining certain defendants from further violations of the Investment Company Act and the Securities Act of 1933 and appointing a trustee and receiver for an unregistered investment company. As of July 1, 1963, there were eight actions still in process. In addition, as pointed out on p. 8, supra, the inspection and investigation program in certain instances produced tangible benefits for investment companies or their shareholders.

SPECIAL STAFF STUDY OF INVESTMENT COMPANIES

Shortly after the beginning of fiscal year 1963 the Wharton School of the University of Pennsylvania submitted to the Commission its Study of Mutual Funds, which the Commission in turn submitted to the Committee on Interstate and Foreign Commerce, House of Representatives. The Study, based on responses to questionnaires, relates to the problems created by the growth in size of investment companies. It 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. The Study 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.

As the Commission stated in its transmittal letter, many of the comments in the Study raise questions of broad policy whether some of the practices and patterns which originated in an earlier time and under different conditions and which have become conventional within the broad tolerances of the 1940 Act should be reconsidered. The Study draws attention to the potential for divided loyalties arising from the typical structure of the industry under which a significant part of the funds' activities are performed by affiliated organizations such as advisers, underwriters, and brokers, who control or are represented on the boards of directors of the funds. Questions are raised by the Study as to the relationship or lack of relationship between the growth, size and performance of funds, and sales commissions and other sales incentives. Attention is further directed to the relationship or lack of it between growth, size and performance of funds, on the

1 S.E.C. v. Science Investments, Inc., et al., Civil Action No. 63-380-C (D. Mass.). 2 Civil Action No. 1P 62-C-528 (S.D. Ind.), aff'd in No. 14116 (C.A. 7, October 8, 1963).