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However, the reports of transactions filed by individual broker-dealers will not be made public.

The Commission plans periodically to conduct detailed transaction studies for the purpose of analyzing particular aspects of activities in the off-board market. The data to be obtained from the reports under Rule 17a-9 and from the transaction studies will enable the Commission to evaluate the need for more detailed reporting and further regulation of this market. Over-the-counter Markets and NASD Organization

Reference has already been made to the very significant development in the regulation of trading in the over-the-counter markets that occurred during the past year—the revision by the NASD of its retail quotations system which was adopted in response to the Congressional mandate in new Section 15A (b) (12) of the 1934 Act and the recommendations of the Special Study.30 As noted, the NASD has engaged an outside management consulting firm to study the effects of the revised system. This study is also designed to determine the possible effects and appropriateness of the Study's recommendations regarding the prohibition of so-called "riskless" principal transactions and requiring certain disclosures to investors of prevailing inter-dealer quotations.

The NASD has taken further steps to improve its organizational structure and internal operations in response to certain criticisms in the Special Study Report. For example, during the year the NASD submitted to its membership for approval proposed revisions in its bylaws which are intended to expedite disciplinary actions and proceedings relating to employment of disqualified persons. The changes were approved by vote of the members after the end of the year. In addition, the Board of Governors has approved a new fee structure which will go into effect in 1966.

Other recommendations regarding the over-the-counter market have received attention in the past fiscal year. Rule 15c2–7 under the Exchange Act, which relates to the operation of the inter-dealer quotation systems, was adopted during fiscal 1965. The rule, which was proposed last year, was discussed in detail at pages 4, 16 and 17 of the Commission's 30th Annual Report. The staff has held several conferences with representatives of the NASD Trading Committee in an effort to develop appropriate standards and/or policy statements concerning a broker-dealer's obligation to provide his customer with the best execution and to furnish bona fide and firm price quotations. In addition, a special committee of the NASD has had under consideration a clarification of its standards with respect to members' pricing practices in transactions with the public.

Supra, p. 13.

Level and Structure of Commission Rate

In connection with staff research on the level of the commission rate, major efforts were directed to improving and expanding the income and expense reports of broker-dealer firms in cooperation with the staff of the New York Stock Exchange. Agreement was reached with the Exchange on a new Exchange rule that would make mandatory the filing of such reports by firms conducting a public commission business; and an understanding was reached that if studies now underway establish the feasibility of certain reports, all New York Stock Exchange firms may be required to report on a mandatory basis. This building-up of an inventory of financial information for securities firms is an essential first step in the gauging of the reasonableness of the commission rate level. The Commission is also pursuing the development of reporting forms to provide detailed financial information regarding all broker-dealers and investment advisers. These reports would give the Commission a more complete picture of the economics of the securities industry and are expected to assist the Commission in the determination of many of the complex matters which are within its responsibilities.

In the last half of the fiscal year, the Commission staff engaged in a series of discussions with the New York Stock Exchange staff on the commission rate structure. These initial steps were directed towards gaining a fuller understanding of the various practices now in effect which permit arrangements allowing for deviation from the fixed minimum commission schedule established by the Exchange. Based partly on the results of these discussions, the Commision staff has been directed to develop proposals for submission to the Commision aimed at evaluating such current practices as "give-ups,” reciprocal arrangements and the provision of special services, with a view to insuring a reasonable commission rate structure. Odd-Lot Differential

The Commission staff has also undertaken a review of the odd-lot differential charged by New York Stock Exchange firms. The Special Study recommended that the Exchange, with the cooperation of the Commission, undertake a cost study of the odd-lot business. This study was begun by Price Waterhouse & Co. in fiscal 1964 and completed in fiscal 1965. During 1965 the Commission staff: (1) met with the Exchange Committee on odd-lots, (2) maintained a continuing oversight of the progress of the Price Waterhouse & Co. cost study, (3) analyzed the cost study report, and (4) began analysis of the oddlot differential in anticipation of a report from the Exchange Committee on odd-lots. Automation of Market Facilities

Throughout the past year the staff has met frequently with representatives of the various exchanges, the National Association of Secur

ities Dealers, suppliers of stock market information and others, on the subject of automation of market facilities. The purpose of these meetings has been twofold. First, they have served to keep the Commission informed of the many developments in this field. Secondly, the meetings have enabled the Commission to make judgments on the direction in which these developments have been moving and to suggest changes, if necessary, for the protection of the public investor.

Discussions with the exchanges have dealt with the central bookkeeping systems, automating surveillance procedures, improving quotations, a central depository for securities, automation of the clearing operation, and the institution of procedures for automating the execution of odd-lot transactions.

Automation in the over-the-counter market has been discussed with the National Association of Securities Dealers and broker-dealers, as well as with vendors who hope to supply the equipment and related services for any such program.

LEGISLATIVE ACTIVITIES

Early in the fiscal year the President signed Public Law 88-467, the Securities Acts Amendments of 1964. This legislation, amending the Securities Act of 1933 and the Securities Exchange Act of 1934, represented the most significant statutory advance in Federal securities regulation and investor protection since 1940. A summary of the amendments appeared in the 30th Annual Report, at pages 8 and 9.

In March 1965, the Commission submitted to the 89th Congress a proposed amendment to the Securities Act of 1933 to provide for an increase in the fees paid in connection with the filing of registration statements for securities offerings, in order to enable the Commission to recover to a greater extent the costs of administration of the Federal securities laws. Subsequent to the end of the fiscal year, the proposed amendment was enacted into law.

On July 23, 1964, then Acting Chairman Cohen testified before Subcommittee No. 1 on Foundations of the Select Committee to Conduct Studies and Investigations of the Problems of Small Business, House of Representatives, concerning the relation of the Commission's administration of the Federal securities laws to the Federal Government's supervision of tax-exempt foundations and charitable trusts. On June 2, 1965, Chairman Cohen also appeared before the Subcommittee on Domestic Finance of the Committee on Banking and Currency, House of Representatives, and testified with respect to H.R. 7372, a bill to amend the Bank Holding Company Act of 1956.

During the fiscal year the Commission and its staff analyzed or commented on 36 bills and other legislative matters referred to it by various committees of the Senate and House of Representatives, by individual members of Congress, and by the Bureau of the Budget.

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PART III

ADMINISTRATION OF THE SECURITIES ACT OF 1933

The Securities Act of 1933 is designed to provide disclosure to investors of material facts concerning securities publicly offered for sale by the use of the mails or instrumentalities of interstate commerce, either by an issuing company or by any person in a control relationship to such company, and to prevent misrepresentation, deceit, or other fraudulent practices in the sale of securities generally. Disclosure is obtained by requiring the issuer of such securities to file with the Commission a registration statement which includes a prospectus containing significant financial and other information about the issuer and the offering. The registration statement is available for public inspection as soon as it is filed. Although the securities may be offered for sale as soon as the registration statement has been filed, actual sales may not be made until the registration statement has become "effective." A copy of the prospectus must be furnished to each purchaser at or before the sale or delivery of securities in order to provide him with an opportunity to evaluate such securities and make an informed investment decision. The issuer and the underwriter are basically responsible for the contents of the registration statement. The Commission has no authority to control the nature or quality of a security to be offered for public sale or to pass upon its merits or the terms of its distribution. Its action in permitting a registration statement to become effective does not constitute approval of the securities, and any representation to the contrary to a prospective purchaser is made unlawful by Section 23 of the Act.

DESCRIPTION OF THE REGISTRATION PROCESS Registration Statement and Prospectus

Registration of any security proposed to be publicly offered may be effected by filing with the Commission a registration statement on the applicable form containing the prescribed disclosure. Generally speaking, a registration statement relating to securities issued by a corporation or other private issuer must contain the information specified in Schedule A of the Act, while a statement relating to securities issued by a foreign government must include the information specified in Schedule B. These schedules specify in considerable detail the items of information which must be disclosed in order to permit prospective investors to make a realistic appraisal of the issuer

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