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REVISION OF RULES, REGULATIONS AND FORMS
Several new rules were either adopted or proposed during the 1964 fiscal year as a direct result of recommendations made in the Report of the Special Study of Securities Markets. In addition, the Commission maintains a continuing program of reviewing its rules, regulations and forms in order to determine whether any changes are appropriate. Certain members of the staff are specifically assigned to this task, but changes are also suggested, from time to time, by other members of the staff and by persons outside of the Commission who are subject to the Commission's requirements or who have occasion to work with those requirements in a professional capacity, such as underwriters, attorneys and accountants. With a few exceptions provided for by the Administrative Procedure Act, proposed new rules, regulations and forms and proposed changes in existing rules, regulations and forms are published in preliminary form for the purpose of obtaining the views and comments of interested persons, including issuers and various industry groups, which are given careful consideration. The changes which were made during the fiscal year as well as those proposed changes which were published in preliminary form and were pending at the end of the year are described below.
THE SECURITIES ACT OF 1933 Adoption of Rule 156
During the fiscal year, the Commission adopted Rule 156 which defines as “transactions by an issuer not involving a public offering" in Section 4(1) of the Securities Act of 1933, transactions which are exempted from the Investment Company Act of 1940 by Rule 3c-3, recently adopted thereunder.2
1 The rules and regulations of the Commission are published in the Code of Federal Reg. ulations, the rules adopted under the various acts administered by the Commission appearing in the following parts of Title 17 of that Code:
Securities Act of 1933, pt. 230.
Investment Advisers Act of 1940, pt. 275.
Rule 3c-3 exempts from the provisions of the Investment Company Act transactions by any insurance company with respect to certain group annuity contracts with employers or their representatives covering at least 25 employees and providing for the administration of funds held by such companies in one or more so-called "separate accounts” established and maintained pursuant to state law. It has been represented to the Commission that because of the variety and complexity of such contracts, they must be separately negotiated with employers who retain expert advisers, are fully informed in the matter and are in a position to fend for themselves.
The new rule under the Securities Act provides that transactions of the character referred to therein shall come within the rule only if the transaction is not advertised by any written communication which, insofar as it relates to a separate account group annuity contract, does more than identify the insurance company, state that it is engaged in the business of writing such contracts and invite inquiries in regard thereto. The rule provides, however, that the limitation on advertising shall not apply to disclosure made in the course of direct discussion or negotiation of such contracts.
It should be noted that the rule provides an exemption only from the provisions of Section 5 of the Act and does not afford any exemption from the anti-fraud provisions of the Act. Amendments to Form S-1, Form S-8 and Form S-11
The Commission announced during the fiscal year that it had under consideration amendments to Forms S-1, S-8, and S-11 believed to be necessary and appropriate in view of changes made by the Revenue Act of 1964 in the provisions of the Internal Revenue Code relating to stock options eligible for special tax treatment. (See Section 221 of the Revenue Act of 1964, Public Law 88,272, 78 Stat. 19). These changes limit the types of stock options which are to receive favorable tax treatment; they eliminate the term “restricted stock options,” ex cept with respect to options which have already been granted or may be granted pursuant to existing plans or contracts; and they designate other tax-favored options as "qualified” or as options granted pursuant to“employee stock purchase plans."
The three forms, which are used for the registration of securities under the Securities Act, require the furnishing of certain information regarding options to purchase securities. The proposed amendments were designed to make these forms consistent with the Internal Revenue Code as amended, i.e., to provide for all tax-favored options the
3 Securities Act Release No. 4686 (April 21, 1964); Securities Act Release No. 4690 (May 12, 1964).
same exemptive or other favorable treatment as had been extended to the previous tax-favored options.
Subsequent to the close of the fiscal year, the proposed amendments were adopted.*
THE SECURITIES EXCHANGE ACT OF 1934
Amendments of Rules 10b-6 and 16b-3 and Form 10
In view of the changes made by the Revenue Act of 1964 in the provisions of the Internal Revenue Code relating to stock options eligible for special tax treatment, as previously described, the Commission announced during the fiscal year that it had under consideration the adoption of amendments to Rules 10b-6 and 16b-3 and Form 10 under the Securities Exchange Act of 1934, which would conform those rules and the form to the changes in the Code.
Form 10 is used for the registration of securities on a national securities exchange. Rule 10b-6 makes it unlawful for certain persons participating or expecting to participate in a distribution of securities, including the issuer of the securities involved in such distribution, to purchase any such security, or any security of the same class or series, until completion of their participation in the distribution, subject to specified exceptions. Paragraph (e) of the rule exempts from its provisions certain distributions pursuant to stock option plans. Rule 166-3 provides an exemption from the insider trading provisions of Section 16(b) for the acquisition of stock options pursuant to a plan meeting specified conditions.
The proposed amendments were adopted subsequent to the close of the fiscal year.? Adoption of Rule lla-1
During the fiscal year, the Commission adopted a new Rule 11a-18 under Section 11 of the Exchange Act to limit or restrict floor trading on national securities exchanges. The rule provides that no member of a national securities exchange may, while on the floor of such exchange or other premises made available for the use of members generally, initiate any transaction in any security traded on the exchange for any account in which he has an interest or in which he is vested with more than the usual broker's discretion, unless the transaction
* Securities Act Release No. 4718 (August 27, 1964). Corresponding amendments were made to Form 10 and Rules 10b-6 and 166–3 under the Securities Exchange Act of 1934.
5 See p. 12, supra.
6 Securities Exchange Act Release No. 7293 (April 21, 1964); Securities Exchange Act Release No. 7315 (May 12, 1964).
? Securities Exchange Act Release No. 7403 (August 27, 1964). & Securities Exchange Act Release No. 7330 (June 2, 1964).
comes under specified exemptions or conditions. An important exemption relates to transactions effected in conformity with a plan adopted by an exchange designed to eliminate floor trading activities not beneficial to the market, provided such plan is approved by the Commission.
The propriety of floor trading by members has been a highly controversial subject over the years and was one which particularly concerned Congress in 1934 in its consideration of the Exchange Act. Although early drafts of the legislation contemplated a complete prohibition of the practice, the statute as finally enacted included in Section 11 (a) a broad grant of authority to the Commission to prescribe such rules and regulations as it might deem necessary to either regulate or prevent floor trading by members. The Commission in the past preferred not to adopt its own rules but relied instead upon rules adopted by the exchanges to control floor trading. Experience demonstrated, however, and studies by the Commission confirmed, that regulation by the exchanges was not effective and in many respects misdirected. Floor traders retained their significant and unwarranted private trading advantage in the market without contributing any corresponding benefit to public investors, continued to concentrate their activities in the more active stocks where member trading is least needed, continued to accentuate price movements and frequently interfered with the orderly execution of public brokerage orders by delaying their consummation or by adversely affecting the price at which they are executed. Rule 11a-1 and the exchange plans adopted pursuant to it are intended to provide a comprehensive system for the regulation of floor trading.
Both the New York Stock Exchange and the American Stock Exchange have adopted floor trading plans which have been approved by the Commission and declared effective. The regional exchanges have been granted exemptions from the provisions of the rule.
The NYSE and AMEX plans are essentially identical and provide for an exemption from the floor trading prohibition for a new member category known as the "registered trader.” These members will be required to meet capital requirements over and above the capital required for other member activities and will be required to pass an examination on the rules and requirements applicable to registered traders. They will be prohibited from executing brokerage orders and floor trading in the same security during a single trading session, will be compelled by a series of new rules to conduct their business
Securities Exchange Act Releases No. 7330 (June 2, 1964) and No. 7374 (July 23, 1964), respectively,
in a way calculated to contribute to the orderliness of the market and will be prohibited from engaging in transactions which would have a disruptive effect upon the market. Finally, they will be required to yield priority, precedence or parity to public orders. The Commission anticipates that the net effect of Rule 11a-1 and these exchange plans will be to restrict floor trading to a small group of professional dealers whose activities will be of maximum assistance to the public in the execution of orders on the exchange. Amendment of Rule 14a-3
Rule 14a-3 relates to the information to be furnished to security holders in connection with the solicitation of proxies. It provides, among other things, that where the management of an issuer solicits proxies for an annual meeting of security holders for the purpose of electing directors, its proxy statement shall be accompanied or preceded by an annual report to such security holders containing such financial statements for the last fiscal year as will in the opinion of management adequately reflect the financial position and operations of the issuer. During the fiscal year, the Commission adopted certain amendments to the rule.10
The amended rule requires the inclusion of consolidated financial statements of the issuer and its subsidiaries in such annual reports to security holders if such statements are necessary to reflect adequately the financial position and results of operations of the issuer and its subsidiaries. However, in such cases the individual financial statements of the issuer may be omitted.
Compliance with the requirements for financial statements filed with the Commission is not required, but any material differences between the principles of consolidation or other accounting principles and practices, or methods of applying accounting principles or practices, applicable to such statements and those reflected in the report to security holders must be noted and the effect thereof reconciled or explained in such report. Provision is made, however, for the omission of details and for suitable condensation in the financial statements included in the report to security holders, provided this does not under the circumstances result in the presentation of misleading financial statements.
The amended rule provides that the financial statements included in reports to security holders shall be certified by independent public or certified public accountants, unless certification is not required in annual reports filed with the Commission or the Commission finds that certification would be impracticable or would involve undue effort
20 Securities Exchange Act Release No. 7324 (May 26, 1964).