or expense. The amended rule also includes certain other minor changes. Amendment to Rules 13a-15 and 15d-15 and Form 7-K Rules 13a-15 and 15d-15 require certain real estate companies to file quarterly reports with respect to distributions to shareholders. Form 7-K is the form prescribed for such reports. During the fiscal year, the Commission adopted certain amendments to Rules 13a-15 and 15d-15 and Form 7-K.11 The rules as amended require the filing of quarterly reports on Form 7-K by real estate investment trusts and by real estate companies which as a matter of policy or practice make distributions to shareholders from sources other than current or retained earnings. Other real estate companies are required to file reports with respect to quarters in which a distribution is made from a source other than current or retained earnings. The amended rules provide for the filing of reports not more than 60 days after the end of the fiscal quarter to which they relate except that the report for the last quarter of the fiscal year must be filed not more than 120 days after the close of the fiscal year. Prior to the amendment the quarterly reports were required to be filed within 45 days after the close of the quarter. The extension of the period for filing reports for the first three quarters should provide adequate opportunity for the collection of information called for by the report by issuers holding numerous properties. The extension of the period for filing the report for the fourth quarter should provide opportunity for reflecting in the information reported any year-end adjustments made in connection with the annual audit of the issuer's accounts or otherwise. Form 7-K has been amended to eliminate the two-column reporting previously required and to clarify the language of the items. In particular, the form has been amplified to provide directions for treatment of minority interests, mortgages received on the sale of property and businesses acquired during the period covered by the report. Adoption of Rule 15c2-7 The rule implements a recommendation of the Report of the Special Study of Securities Markets designed to improve the reliability and informativeness of the wholesale quotations system through which dealers advertise their buying or selling interests in securities traded over-the-counter. The "sheets" published by the National Quotation Bureau, Inc., are the primary medium for the dissemination of wholesale or "inside" quotations among broker-dealers in the over-the 11 Securities Exchange Act Release No. 7246 (February 28, 1964). counter markets. Broker-dealers use the sheets to communicate buying and selling interests in securities by placing their names in the sheets, together with accompanying quotations. However, if a broker-dealer submits a quotation to the sheets on behalf of another broker-dealer, there is no indication in the sheets that the appearing broker-dealer is quoting a market on behalf of another. The Special Study pointed out that the failure to differentiate in any way quotations entered for correspondents and quotations representing multiple expressions of the same market, prevents persons using the sheets from determining the actual depth and activity of the market for a particular security and the identity of the actual primary market makers for such security. This failure to differentiate quotations entered by one broker-dealer on behalf of another from other quotations may also result, as documented by the Special Study, in the use of the sheets for fraudulent or manipulative purposes. The purpose of Rule 15c2-7 is to insure that an inter-dealer quotation system clearly reveals those instances where two or more quotations in different names for a particular security represent a single quotation or where one broker-dealer appears as a correspondent of another. The rule requires a broker-dealer who is a correspondent for another firm for a particular security and enters quotations in the sheets to inform the service of the correspondent arrangement and the identity of his correspondent. By requiring disclosure of the correspondent, as well as of the fact of such an arrangement, the rule permits users of the sheets to determine the identity of dealers making an inter-dealer market for a security—a fact which may be extremely pertinent in evaluating its marketability. The rule also requires that where two or more broker-dealers place quotations in the sheets pursuant to any other arrangement between or among broker-dealers, the identity of each broker-dealer participating in any such arrangement or arrangements, and the fact that an arrangement exists, must be disclosed. Because of the variety of market-making arrangements between broker-dealers resulting in appearances in the sheets, the rule does not limit the type of arrangement covered; the purpose of the rule is to cover any arrangement between broker-dealers, such as joint accounts, guarantees of profit or against loss, commissions, mark-ups, mark-downs, indications of interest and accommodations.12 12 The rule was adopted shortly after the end of the fiscal year. See Securities Exchange Act Release No. 7381 (August 6, 1964). Adoption of Rule 15c3-2 The Special Study of Securities Markets found that many customers of broker-dealers were unaware (1) that when they leave free credit balances (funds which the customer has an unrestricted right to withdraw) with a broker-dealer the funds generally are not segregated and held for the customer but are commingled with other funds of the broker-dealer and used in the operation of his business, and (2) that the relationship between the broker-dealer and the customer as a result thereof is that of debtor-creditor. The purpose of Rule 15c3-2 is to put customers on notice that free credit balances left with the brokerdealer may be used in the business and therefore may be at risk. The rule, effective August 3, 1964, prohibits a broker or dealer from using in his business any funds arising out of any free credit balance carried for the account of any customer unless he has established adequate procedures pursuant to which each such customer will be given or sent, together with or as a part of the customer's statement of account, whenever sent, but not less frequently than once every 3 months, a written statement informing the customer of the amount due, and containing a written notice that such funds are not segregated and may be used in the operation of the business of the broker-dealer, and that such funds are payable on demand. The rule provides an exemption for a banking institution supervised and examined by state or Federal authority having supervision over banks.13 Adoption of Rule 16b-9 During the fiscal year, the Commission adopted a new Rule 16b-9 which exempts from the operation of Section 16 (b) of the Securities Exchange Act of 1934 certain transactions in which shares of stock are exchanged for similar shares of stock of the same issuer.1 Section 16(b) provides for the recovery, by or on behalf of an issuer of equity securities registered under the Exchange Act, of short-term trading profits realized by directors, officers and principal security holders of the issuer. The Commission is authorized to exempt from Section 16(b) transactions not comprehended within the purpose of that section. The new rule exempts from the operation of Section 16(b) any acquisition or disposition of shares of stock of an issuer in exchange for an equivalent number of shares of another class of stock of the same issuer pursuant to a right of conversion under the terms of the issuer's charter or other governing instruments. The exemption is available only if (1) the shares surrendered and those acquired in 13 Securities Exchange Act Release No. 7325 (May 27, 1964). exchange therefor evidence substantially the same rights and privileges except that the shares surrendered may, in the discretion of the board of directors, receive a lesser dividend than the shares for which they are exchanged and (2) the transaction was effected in contemplation of a public sale of the shares acquired in the exchange. This rule is intended to relate only to the typical Class A and B common equity securities. Adoption of Rule 17a-8 During the fiscal year, the Commission adopted Rule 17a-8,15 which requires national securities exchanges to file reports of proposed rule changes with the Commission prior to any final exchange adoption of such changes. Under the Exchange Act the Commission has the responsibility for overseeing the self-regulatory functions of national securities exchanges. Under Sections 11, 19 (b) and other sections of the Act, the Commission has broad powers and responsibilities with respect to the rules of such exchanges, including the power to alter or supplement exchange rules in specified areas of exchange operations and the power to enact its own rules in other areas if the exchanges' rules are inadequate to protect investors and assure fair dealing. Chapter XII of the Special Study Report concluded that the Commission's existing procedures for the review of exchange rules did not appear to be sufficient to assure the needed continuous oversight on the part of the Commission to enable it to discharge its responsibilities under the Act. The Report recommended that the exchanges be required to file all proposed rule changes with the Commission in advance of effectiveness, as has always been required in the case of rules of the National Association of Securities Dealers, Inc. Rule 17a-8 was adopted in response to that recommendation and is intended to afford the Commission an adequate interval for orderly review of new exchange rules or amendments before they become effective. The rule provides that each national securities exchange shall file a report of any proposed change in, or addition to, its rules not less than 3 weeks before it is submitted for any action by the membership or any governing body of the exchange. If any substantive change is made in the proposal after the report is filed with the Commission, a new 3-week notice is required unless the change is made to conform it to a suggestion made by the Commission. The rule also provides that if emergencies arise in which a report cannot be filed as provided above, the exchange shall give the Commission as much advance notice as the circumstances permit, together with a written statement of the reasons why the filing of a report as required was impracticable. 15 Securities Exchange Act Release No. 7253 (March 3, 1964). Proposed Rule 17a-9 During the fiscal year, the Commission staff drafted a proposed rule and related reporting forms requiring broker-dealers to report certain information concerning over-the-counter trading in common stocks traded on national securities exchanges. The proposed rule, to be designated Rule 17a-9, was published for public comment shortly after the end of the fiscal year.16 It is intended to implement recommendations of the Special Study of Securities Markets. The Report of the Special Study describes a striking increase in the volume of off-board trading in common stocks traded on the New York Stock Exchange and other national securities exchanges in recent years. But the Study found "an acute lack of data" concerning this trading, which it described as the "third market." The Study recommended correction of this deficiency by establishment of a system for the identification of market makers and for reporting information concerning trading in this market. The proposed rule and reporting forms are designed to enable the Commission to obtain information on the third market on a continuous basis and thus keep abreast of any regulatory problems which may develop therein. It would obtain two basic types of information: (1) an identification of broker-dealers making off-board markets in common stocks traded on any national securities exchange; and (2) summaries of over-the-counter trading in common stocks traded on the New York Stock Exchange. Proposed Amendments to Form 8-K Form 8-K is prescribed for current reports filed pursuant to Sections 13 and 15(d) of the Securities Exchange Act. During the 1962 fiscal year, the Commission announced that it had under consideration certain proposed amendments to Form 8-K and invited public comments.1 The amendments are designed to bring to the attention of investors prompt information regarding matters such as the pledging of securities of the issuer or its affiliates under circumstances that a default will result in a change in control of the issuer, changes in the board of directors otherwise than by stockholder action, the acquisition or disposition of a significant amount of assets otherwise than in the ordinary course of business, interests of management and others in certain transactions, and the issuance of debt securities by subsidiaries. These amendments were still under consideration at the close of the last fiscal year. 16 Securities Exchange Act Release No. 7360 (July 8, 1964). 17 Securities Exchange Act Release No. 6770 (April 5, 1962). |