Imágenes de páginas



OF 1940

The Investment Advisers Act of 1940 established a pattern of regulation of investment advisers similar to that contained in the Securities Exchange Act with respect to the conduct of broker-dealers. With certain specific exceptions, the Act requires persons engaged for compensation in the business of advising others with respect to securities to register with the Commission and to conform to statutory standards designed to protect the public interest. The Act prohibits fraudulent conduct, and authorizes the Commission to define, and prescribe means reasonably designed to prevent fraudulent, deceptive or manipulative acts or practices. Pursuant to such authority, Rule 206(4)-1 proscribes, among other things, the use of testimonials, circumscribes permissible references to past recommendations and the use of graphs and charts, and prohibits the use of false or misleading statements. Under Rule 206(4)-2, an investment adviser who has custody or possession of the funds or securities of clients must segregate them, maintain them in the manner provided in the rule and comply with certain other conditions.

The Act prohibits an investment adviser from basing his compensation upon a share of the capital gains or appreciation of his client's funds, and prohibits the assignment of investment advisory contracts without the client's consent. Advisers are also required to make, keep and preserve books and records in accordance with the Commission's rules and the Commission is empowered to conduct inspections of such books and records.

Investment advisers who violate any of the provisions of the Act or of the rules thereunder are subject to appropriate administrative, civil or criminal sanctions. The Act provides, in Section 203(d), that the Commission shall deny, revoke, or suspend for not more than 12 months, the registration of an investment adviser if it finds that such action is in the public interest and that the investment adviser or any partner, officer, director or controlling or controlled person of the investment adviser is subject to a specified disqualification. These disqualifications include wilful misstatements in an application or report filed with the Commission, the existence of a conviction or injunction based on or related to specified types of misconduct, wilful violation of any provision of the Securities Act, Securities Exchange

Act or Investment Advisers Act or any rule or regulation thereunder, and aiding and abetting any other person's violation of such provisions, rules or regulations. In addition, the Commission may seek injunctions to restrain violations of the Act and may recommend criminal prosecution by the Department of Justice for fraudulent misconduct or wilful violation of the Act or the Commission's rules thereunder. Registration Statistics

At the close of the fiscal year 1,600 investment advisers were registered with the Commission. The following tabulation contains other statistics relating to registrations and applications for registration :

Investment adviser registrations--fiscal year 1965 Effective registrations at close of preceding year..

1, 613 Applications pending at close of preceding year.

22 Applications filed during year----

261 Registrations cancelled or withdrawn during year.

259 Registrations denied or revoked during year--

5 Applications withdrawn during year---

10 Applications pending at end of year..

23 Inspection Program

During fiscal 1965, 260 inspections of investment advisers were completed by the Commission's staff (as compared to 239 the preceding year). These inspections disclosed a total of 171 indicated violations of the Act and the rules and regulations promulgated thereunder, as reflected in the following table:

Violations noted in investment adviser inspection reportsfiscal year 1965 Books and records deficient-

43 Registration application inaccurate-

58 False, misleading, or otherwise prohibited advertising

20 Improper "hedge clause" a

12 Failure to provide for nonassignability in investment advisory contract--- 23 Others


Total indicated violations ---

171 a "Hedge clauses" used in literature distributed by investment advisers generally state in substance that the information furnished is obtained from sources believed to be reliable, but that no assurance can be given as to its accuracy. A clause of this nature may be improper where the recipient may be led to believe that he has waived any right of action against the investment adviser. Administrative Proceedings

Set forth below are statistics with respect to administrative proceedings under the Investment Advisers Act which were pending during fiscal year 1965 : Proceedings pending at beginning of fiscal year: Against investment adviser registrants---

13 Against investment adviser applicants--




[blocks in formation]

Disposition of proceedings :

Registration revoked.--
Registration denied...
Registration canceled.-
Registrant censured.-
Registrant ordered to refrain for a period of time from advertising

for new subscribers to its publications.. Proceedings dismissed..

4 1 2 1

2 3

[blocks in formation]


Total proceedings accounted for. Among the decisions rendered during the fiscal year was one in which the Commission discussed at some length the obligations of investment advisers with respect to advertising material. In view of mitigating factors, the Commission, in Spear & Staff, Incorporated, accepted an offer of settlement consenting to findings that the registrant, aided and abetted by its president, wilfully violated the antifraud provisions of the Act and providing for an order directing registrant to refrain for 90 days from advertising for new subscribers to its publications and to undertake during that period to establish controls for the purpose of preventing future violations.

In its Findings and Opinion, the Commission analyzed registrant's advertising for its market letters, and found that such advertising was couched in enthusiastic and dramatic language, insistently implying that registrant possessed the ability to select stocks that were certain to appreciate in price substantially and rapidly and that “a certain road to riches was at hand for those who availed themselves of registrant's guidance." A frequently used advertisement inquired of prospective subscribers whether they desired to double their money in perhaps 12 or 24 months and urged that if they were so interested, they

'Investment Advisers Act Release No. 174 (July 14, 1964).
? Investment Advisers Act Release No. 188 (March 25, 1965).


should learn about special situation investing from registrant. Another technique was to recount outstanding success stories and attribute the success of the selected individuals to investments in special situations, thereby furthering the impression that registrant was able to uncover for its subscribers opportunities for outstanding profits comparable to those which the described individuals had realized.

The Commission concluded that registrant's advertisements were deceptive and misleading in their over-all effect, particularly on unsophisticated investors, even though arguably no single statement was literally false. It stated that the advertisements obscured the numerous uncertainties and imponderables inherent in any attempt to forecast security prices. The Commission stated that in accepting respondents' offer of settlement, despite the seriousness with which it viewed the violation, it took into account that this was one of the first administrative proceedings in which it had dealt with the question of improper investment advisory advertising material, and various other mitigating factors. It emphasized, however, that the relative leniency of the sanction imposed should not be misconstrued since in light of the admonitions of its opinion it would be disposed to deal more severely with any future instances of false and misleading advertising by investment advisers.




The several statutes administered by the Commission authorize the Commission to seek injunctions against continuing or threatened violations of such statutes. Such violations may involve a wide range of illegal practices, including the purchase or sale of securities by fraud, and the sale of securities without compliance with the registration requirements of the Securities Act. The Commission also participates in various other types of proceedings, including appearances as amicus curiae in litigation between private parties where it is important that its views regarding the interpretation of the statutory provisions involved be furnished to the court, corporate reorganization proceedings under Chapter X of the Bankruptcy Act, and various types of civil appellate proceedings.

Tables 11 and 12 in the appendix to this report contain statistics with respect to the various types of civil proceedings in which the Commission participated prior to and during the fiscal year. A summary of injunction proceedings instituted by the Commission since 1934 may be found in Table 15. This section describes a few of the more noteworthy cases which were pending during the fiscal year, not including, however, cases arising under the Public Utility Holding Company Act or Chapter X of the Bankruptcy Act; such cases are discussed in the sections of this report dealing with those statutes.

During the year, the Commission was involved in significant litigation, both as a party and in an amicus curiae capacity, based upon Rule 106-5 under the Securities Exchange Act of 1934. In Securities and Exchange Commission v. Texas Gulf Sulphur Co.,' an action instituted in April 1965, the Commission alleges that the rule was violated when certain officials of the defendant company purchased shares of its stock, as well as calls on such stock, between November 12, 1963 and April 16, 1964, without disclosing to the sellers material facts of which the officials were aware concerning the company's mining activities near Timmins, Ontario, Canada. The complaint alleges that on November 12, 1963, the company had completed a drill hole which has been characterized as the “most impressive ... in modern times.” It is alleged that additional violations of the rule occurred when certain

S.D.N.Y., No. 65 Civ. 1182.

« AnteriorContinuar »