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particularly difficult or novel questions arise which cannot be settled by the accounting staff of the divisions and by the Chief Accountant, they are referred to the Commission for consideration and decision.

Difficulties often arise in connection with initial filings because accountants and other advisers who serve the registrant have not had any prior experience with the Commission. In some cases these persons have not familiarized themselves with the rules and regulations of the Commission-particularly the instructions as to financial statements required by the forms, the rules relating to independence of the certifying accountant, and those relating to the form and content of financial statements as set forth in Regulation S-X. In an effort to improve this situation several members of the accounting staff of the Commission, at the invitation of the sponsor, the American Institute of Certified Public Accountants, participated in a course on filings with the Commission. This course, in which the enrollment quota was filled each time it was presented, was given in Chicago, Los Angeles, New York, and San Francisco. It appears that the course will be offered during the next fiscal year in cities located in other sections of the United States.

54

In 1961, the Commission adopted Form S-11, a new form designed to provide adequate disclosure of certain special problems found in filings made by real estate companies. In June 1962, the Commission also adopted new Rules 13a-15 and 15d-15 under the Securities Exchange Act and new Form 7-K to require such companies to file quarterly reports showing profit and loss, cash generated, cash distributions to stockholders and cash balance.55

At the time these new forms and rules were adopted it was believed that information filed pursuant to these requirements would provide adequate disclosures with respect to the financial condition and operations of real estate companies. However, late in 1962 a number of cases came to the attention of the Commission in which the gross profits on certain real estate transactions were taken into income under circumstances which indicated that they were not realized in the period in which the transactions were recorded.

In some of the situations coming before the Commission it appeared from the attendant circumstances that the sale of property was a mere fiction designed to create the illusion of profits or value as a basis for the sale of securities. Moreover, even in bona fide transactions the degree of uncertainty as to the ultimate realization of profits appeared to be so great that business prudence, as well as generally accepted

64 Securities Act Release No. 4422 (October 26, 1981).

65 Securities Exchange Act Release No. 6820 and Securities Act Release No. 4499 (June 12, 1962).

accounting principles, precluded the recognition of gain at the time of sale. In view of the foregoing the Commission issued Accounting Series Release No. 95 56 in which it listed circumstances which tend to raise a question as to the propriety of current recognition of profit and stated that while any of the circumstances taken alone might not preclude the recognition of profit in an appropriate amount the degree of uncertainty may be accentuated by the presence of a combination of the circumstances listed in the release.

57

The Chief Accountant's Office cooperated with the Division of Corporate Regulation in the preparation of amendments to Rules 31a-1 and 31a-2 under the Investment Company Act of 1940 and of a new Rule 31a-3, which were adopted by the Commission in November 1962. These rules, which are discussed in more detail at page 19, supra, relate to records to be maintained and preserved by registered investment companies, certain majority-owned subsidiaries thereof, and other persons having transactions with registered investment companies.

The Chief Accountant and his staff continued to cooperate with other divisions of the Commission and the industry in the preparation of a proposal to amend Regulation S-X which would add to that regulation provisions governing the form and content of financial statements and related schedules to be filed by life insurance companies. The Commission's guide to the form and content of financial statements is found in Regulation S-X which is supplemented by a series of accounting releases. Number 4 in this series was published April 25, 1938, and still is the significant statement of the Commission's administrative policy on financial statements. This policy was re-emphasized in January 1963, when the Commission found it necessary to issue an accounting release 58 expressing some views on accounting for the "investment credit," a new idea in the United States tax law which stirred up considerable difference of opinion in business and professional accounting circles.

In view of the substantial diversity of opinion that exists in this matter, the Commission stated, in its release, that it will accept with certain limitations either the method endorsed by the Accounting Principles Board of the American Institute of Certified Public Accountants 59 or the 48-52 percent method or, in the case of regulated industries, the 100 percent flow-through method when authorized or required by regulatory authorities. This release also specified that the balance sheet credit should not be made directly to the asset account,

58 December 28, 1962.

57 Investment Company Act of 1940, Release No. 3578 (November 28, 1962). 58 Accounting Series Release No. 96 (January 10, 1963).

59 Opinion of the Accounting Principles Board, No. 12 (December 1962).

and that income tax should not be stated in excess of the amount payable for the year, and included other comments regarding adequate disclosure, details of certain other accounts, and acceptance of appropriately qualified certificates in cases where an alternative accounting treatment acceptable to the Commission is followed by the registrant. Shortly before the close of the fiscal year the Commission issued its Findings, Opinion and Order in Harmon R. Stone, a proceeding under Rule 2(e) of its Rules of Practice.60 The Commission found that Stone, a certified public accountant, had inadequately performed his professional duties and engaged in activities incompatible with required professional independence. In his audits of a broker-dealer, Stone omitted many of the Commission's Minimum Audit Requirements applicable to Form X-17A-5 relating to reports of registered broker-dealers and failed to comply with generally accepted auditing standards in that he did not properly obtain confirmation of customers' accounts and closed accounts; did not properly balance securities positions or verify securities in transfer; did not take physical control of all cash, securities and other transferable evidence of ownership and maintain such control until those items were inspected, counted, and compared with the records and did not perform other additional verification procedures. Stone's failure to properly perform these procedures negated the effectiveness of his audit; and consequently his audit fell far short of the objective review required for the purpose of safeguarding funds and securities of customers and failed to give the public the protection which an audit is designed to achieve. Stone's certificates stating that his examinations were made in accordance with generally accepted auditing standards were accordingly false and misleading. Stone's lack of independence resulted from the fact that he acquired a personal financial interest in the repayment of loans made by a company in which he was a principal stockholder to salesmen and customers of his client, a registered broker-dealer. In reaching its conclusion the Commission took into consideration the fact that Stone had been a certified public accountant since 1950. Apart from these proceedings there was no evidence that his professional conduct had ever been questioned and he submitted statements from a large number of persons who attested to his character and competence in other accounting work. The Commission did not believe that its findings in these proceedings raised a basic question as to his personal integrity and noted that Stone responded to its staff's examination into this matter with full cooperation and candor. However, because Stone's conduct constituted a serious breach of the standards of his profession and of his responsi

60 Accounting Series Release No. 97 (May 21, 1963).

bilities to the Commission and to the public, which cannot be condoned, he was denied the privilege of practicing before the Commission for a period of 60 days.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Section 15 of the Bretton Woods Agreements Act, as amended, exempts from registration under both the Securities Act of 1933 and the Securities Exchange Act of 1934 securities issued, or guaranteed as to both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the Commission such annual and other reports with respect to such securities as the Commission shall determine to be appropriate in view of the special character of the Bank and its operations and necessary in the public interest or for the protection of investors. The Commission has, pursuant to the above authority, adopted rules requiring the Bank to file quarterly reports and also to file copies of each annual report of the Bank to its board of governors. The Bank is also required to file reports with the Commission in advance of any distribution in the United States of its primary obligations. The Commission, acting in consultation with the National Advisory Council on International Monetary and Financial Problems, is authorized to suspend the exemption at any time as to any or all securities issued or guaranteed by the Bank during the period of such suspension.

During the Bank's last fiscal year, ending June 30, 1963, the Bank made 28 loans totaling the equivalent of $448.7 million, compared with a total of $882.3 million last year. The loans were made in Colombia (3 loans), Cyprus, El Salvador, Finland, India, Israel, Mexico, Morocco, Nicaragua, Nigeria, Pakistan (3 loans), Panama, Peru, Philippines (2 loans), Singapore, Swaziland, Thailand (4 loans), Uruguay and Yugoslavia (2 loans). This brought the gross total of loan commitments at June 30, to $7,121.5 million. By June 30, as a result of cancellations, repayments, sales of loans and exchange adjustments, the portions of loans signed and still retained by the Bank had been reduced to $4,712.3 million.

During the year the Bank sold or agreed to sell $273.3 million principal amount of loans. On June 30, the total sales of loans amounted to $1,605.3 million, of which all except $69 million was without the Bank's guarantee.

The outstanding funded debt of the Bank amounted to $2,519.2 million on June 30, 1963, reflecting a net decrease of $1.6 million in the past year. During the year there was a gross increase in borrowings of $124 million. This consisted of a Netherlands guilder public bond issue in the amount of f.40 million (US$11 million equivalent);

a public offering of $5 million of U.S. dollar bonds in Austria, and a placement of $5 million of U.S. dollar notes with the central bank of Austria; the private placement of an issue of $100 million of U.S. dollar bonds; and the delivery of $3 million of bonds which had been subject to delayed delivery arrangements. The funded debt was decreased by $125.6 million as a result of the maturing of the equivalent of $107.8 million of bonds, and of sinking fund and purchase fund transactions amounting to $17.8 million.

During the fiscal year, Ivory Coast, Jamaica, Kuwait, Niger, Senegal, Sierra Leone, Somalia, Tanganyika, Togo and Upper Volta became members of the Bank with subscriptions aggregating $245 million. On June 30, 1963, the Bank had 85 members with capital subscriptions totaling $20,729.8 million.

INTER-AMERICAN DEVELOPMENT BANK

The Inter-American Development Bank Act, which authorizes the United States to participate in the new Inter-American Development Bank, provides an exemption for certain securities which may be issued by the Bank similar to that provided for securities of the International Bank for Reconstruction and Development. Acting pursuant to this authority, the Commission adopted Regulation IA, which requires the Bank to file with the Commission substantially the same information, documents and reports as are required from the International Bank for Reconstruction and Development. The Bank is also required to file a report with the Commission prior to the sale of any of its primary obligations to the public in the United States. During the year ended June 30, 1963, the Bank made 22 loans totaling the equivalent of $146,109,191 from its ordinary capital resources, bringing the gross total of loan commitments outstanding at June 30, to 69 loans aggregating $294,966,049. During the year, the Bank sold or agreed to sell $4,749,772 in participations in the aforesaid loans, all of such participations being without the guarantee of the Bank. The loans from the Bank's ordinary capital resources were made in Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Paraguay, Peru, Uruguay, and Venezuela.

During the year the Bank also made 13 loans from its Fund for Special Operations totaling the equivalent of $49,588,927, bringing the gross total of loan commitments outstanding at June 30, to 33 loans aggregating $116,908,031. The Bank made 28 loans during the year from the Social Progress Trust Fund, which it administers under an Agreement with the United States, aggregating $124,125,000, bringing the gross total of loan commitments outstanding at June 30, to 64 loans aggregating $347,912,000.

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