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one hand, and advisory fees and costs of operation of the funds and of the advisers, including fees charged by advisers to other clients, on the other hand. The Study comments upon the role of and in general questions the effectiveness of “unaffiliated" directors of the typical fund.
The Wharton School Study, as noted, is a report to the Commission and not by the Commission. In forwarding the Study to the Congress, the Commission stated that it would be premature to attempt an evaluation of the conclusions in the Study, but that it was apparent that the Commission's rules under the 1940 Act and indeed some of the provisions of the statute itself might require reassessment. The Commission accordingly directed its staff to conduct a detailed analysis of the Study with a view to making such recommendations as may seem appropriate. During fiscal 1963 members of the staff of the Division of Corporate Regulation have been engaged in conducting this staff study, including intensive field visits to selected investment companies and complexes of different types, and interviews with persons in the industry, including "unaffiliated" directors. Its scope includes a review of the structure of the investment company industry generally, and a reassessment of the provisions of the Investment Company Act and the Commission's rules and regulations thereunder.
This staff project has been coordinated with the work of the Special Study of Securities Markets, which considered certain aspects of the investment company industry not covered by the Wharton School Study, namely sales techniques, the adequacy of training and supervision of salesmen, "contractual" or "front-end load" plans for the purchase of investment company shares and the possible use of inside information with respect to portfolio transactions by those closely affiliated with investment companies. The conclusions and recommendations of the Special Study in these areas are contained in Chapter XI of the Special Study report, transmitted by the Commission to the Congress shortly after the close of the fiscal year 1963. In one of the areas covered, that of "contractual” plans, the Special Study made recommendations of a tentative nature, suggesting that final recommendations be made only after completion of the comprehensive staff study.
It is contemplated that the staff study will be completed during fiscal 1964, and that its analysis, together with the reports of the Wharton School and the Special Study of Securities Markets, will aid the Commission in determining whether specific legislative recommendations should be made to the Congress with respect to the 1940 Act and what action, if any, should be taken to strengthen the rules and regulations under the Act.
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----
530 Quarterly reports---
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
ing July 1, 1962
Definition of controlled person. 3 and 6.
Status and exemption.-7(d).
Registration of foreign investment companies.. 8(1)
Termination of registration... 9, 10, 16..
Regulation of affiliations of directors, officers, em
ployees, investment advisers, underwriters and
others. 12, 13, 14(a), 15... Regulation of functions and activities of investment
companies.. 11, 25..
Regulation of security exchange offers and reorgani
zation matters.. 17
Regulation of transactions with affiliated persons. 18, 19, 21, 22, 23.- Requirements as to capital structures, loans, distri
butions and redemptions, and related matters... Proxies, reports, and other documents reviewed for
Regulation of face-amount certificate companies.
Some of the more significant matters in which applications were considered are summarized below:
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.
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.
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).
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.11 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 Şection 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.