Science Investors, Inc.5 Under the terms of the settlement, a former director of this investment company agreed to pay $225,000 to the company. The injunctive action had stemmed largely from the director's personal transactions in a security which was also included in the company's portfolio. In addition, the Commission settled several matters out of court with resulting benefits to investors.

ANNUAL REPORTING BY MANAGEMENT INVESTMENT COMPANIES

During the fiscal year, the initial annual reports to the Commission by registered management investment companies on the revised reporting form, captioned N-1R, were utilized by the Division of Corporate Regulation in the examination of investment company matters, including the program of inspection and enforment. The reports have been of substantial assistance in the processing of investment company filings, the inspection of investment companies, and the disclosure of violations of the Act. They provide considerable savings in time and expense by making available information relating to individual companies which could otherwise only be obtained through more frequent and detailed inspections. The reports also enable the Commission to develop information on various industry practices as an important aid to the exercise of the Commission's responsibilities under the statute.

FILINGS REVIEWED

As previously noted, investment companies offering their shares for sale to the public must register them under the Securities Act of 1933. The companies themselves, of course, must register under the Investment Company Act. The registration statements of investment companies filed pursuant to the Securities Act are reviewed for compliance with that Act and the Investment Company Act. The Commission's rules promulgated under the Investment Company Act generally require that the basic information contained in notifications of registration and in registration statements of investment companies filed under the Investment Company Act be kept current through periodic and other reports. In addition, proxy soliciting material filed by investment companies is reviewed for compliance with the Commission's proxy rules. The following table sets forth the nature and volume of filings processed during the past fiscal year:

"S.E.C. v. Ling et al., No. CA-3-447 (N.D. Tex.) August 3, 1965 (final order approving settlement).

The adoption by the Commission of Form N-1R and the primary purposes of the revisions of the form are described in the 31st Annual Report, pp. 111-112.

Under Section 6 (c) of the Act, the Commission, by rules and regulations, upon its own motion or by order upon application, may exempt any person, security, or transaction from any provision of the Act if and to the extent such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Other Sections, such as 6(d), 9(b), 10(f), 17(b), 17(d), and 23(c), contain specific provisions and standards pursuant to which the Commission may grant exemptions from particular sections of the Act or may approve certain types of transactions. Also, under certain provisions of Sections 2, 3, and 8, the Commission may determine the status of persons and companies under the Act. One of the principal activities of the Commission in its regulation of investment companies is the consideration of applications for orders under the sections referred to.

During the fiscal year, 213 applications filed under various sections of the Act were before the Commission, and 183 applications were disposed of. As of the end of the year, 100 applications were pending. The sections of the Aet with which these applications were concerned and the disposition of applications are shown in the following table:

Applications filed with or acted upon by the Commission under the Investment Company Act during the fiscal year ended June 30, 1966

17.

27.

28.

Total.

12, 13, 14(a), 15... Regulation of functions and activities of investment

11, 25.

18, 19, 21, 22, 23.

7

0

21

10

1

*These figures represent an adjustment of last year's figures.

Some of the more significant matters in which applications were considered are summarized below:

On March 9, 1966 the Commission, with one Commissioner dissenting, issued its opinion and order granting in part, and denying in part, an application filed pursuant to Section 6(c) of the Act by First National City Bank of New York requesting exemptions from certain provisions of the Act, principally Sections 10 (b) (3), 10(c), and 10 (d) (2), with respect to a Commingled Investment Account ("Account") which the Bank proposed to establish and to register under the Act as a diversified open-end management investment company." The Bank's application proposed that the Account would operate as a collective investment fund pursuant to regulations of the Comptroller of the Currency and accept investments of $10,000 or more pursuant to agreements between investors and the Bank. No sales load would be imposed. The Bank would serve as investment adviser for the Account, subject to investor approval. The operation of the Account was to be subject to the supervision of a Committee of at least three persons, at least one of whom would be unaffiliated with the Bank. The Commission denied an exemption from Section 10 (d) (2) of the Act. This exemption would have permitted all but one of the members of the Committee, which would be equivalent to a board of directors, to be affiliated with the Bank. However, the Commission granted exemptions from Sections 10 (b) (2), 10 (b) (3), and 10 (c) of the Act, which provide in substance that the majority of the board of directors of a registered investment company may not be (a) affiliated with the principal underwriter of the investment company, (b) affiliated with an investment banker, or (c) officers or directors of any one bank. The effect of the exemptions granted by the Commission was thus to permit a majority of the Committee to consist of officers or directors of, or persons otherwise affiliated with, the Bank. The Account remains subject to Section 10 (a) of the Act, under which not more than 60 percent of the members of the Committee may consist of persons who are affiliated with the Bank.

In granting the exemptions, the Commission stressed, among other things, that the Account differed substantially from the bank-dominated investment companies with which Congress was concerned in enacting Section 10 (c) and that there were substantial safeguards

7 Investment Company Act Release No. 4538, corrected March 14, 1966, Investment Company Act Release No. 4538a. Petition for rehearing denied, Investment Company Act Release No. 4563 (April 6, 1966).

against conflicts of interest which could arise as a result of the Bank's commercial banking activities.

Commissioner Budge, dissenting from the Commission's decision, stated that the granting of the exemptions was contrary to the expressed statutory prohibition against bank domination of investment companies. He referred to the statutory history which indicated conflicts and potential conflicts of interest between a bank and the investment company it dominates. He expressed the view that if the restrictions of Section 10 (c) are to be avoided, this should be accomplished through legislation and not through ad hoc exemptions, particularly when, as here, the Commission and the bank regulatory agencies have adopted contrary interpretations as to the very nature of the proposed investment company.

The National Association of Securities Dealers, Inc. which appeared in opposition to the Bank's application, has filed a petition to review the Commission's order in the Court of Appeals for the District of Columbia Circuit. The Investment Company Institute, which also opposed the application, filed a complaint in the District Court for the District of Columbia against the Comptroller of the Currency seeking, among other things, to enjoin his approval of the Bank's plan.

On May 6, 1966, the Commission released its Findings and Opinions and Order in Electric Bond and Share Company. This opinion denied the application of Electric Bond and Share Company ("Bond and Share") for an order pursuant to Section 8(f) of the Act declaring that it had ceased to be an investment company and also denied Bond and Share's alternative applications pursuant to Section 3(b) (2) of the Act for an order declaring that it is not primarily engaged in the business of an investment company and, pursuant to Section 6(c) of the Act, for an order exempting it from the Act. The Commission also denied the application of American & Foreign Power Company Inc. ("Foreign Power"), a majority-owned subsidiary of Bond and Share, for an order pursuant to Section 3(b) (2) of the Act declaring that Foreign Power is not an investment company, or alternatively, for an order exempting it from the Act pursuant to Section 6(c).

In rejecting the applications, the Commission stated that obligations of foreign countries, which Foreign Power had received in exchange for various of its foreign utility interests, are investment securities as that term is used in the Act. Such securities constituted over 80 percent of Foreign Power's assets from which it derived about 76 percent of its income. Therefore, the Commission held that

Foreign Power was no longer primarily engaged in utility operations and that it was not entitled to exemption from the Act. In addition, the Commission held that Bond and Share was not entitled to exemption from the Act since about two-thirds of its assets from which it derived about 60 percent of its income consisted of marketable investment securities and securities of Foreign Power.

On May 11, 1966, the Commission issued its opinion and order denying motions to dismiss an application filed pursuant to Section 2(a)(9) of the Act by Randolph Phillips, a stockholder of four investment companies for which Investors Diversified Services, Inc. ("IDS") serves as investment adviser and principal underwriter, and denying the control determinations sought by Phillips. In refusing to dismiss the application, the Commission, adhering to the conclusions reached by it in Fundamental Investors, Inc.,10 held that a shareholder of a registered investment company is an "interested person" within the meaning of Section 2(a) (9) of the Act and entitled to file with the Commission an application for an order that, contrary to the presumptions contained in that section, a person or group of persons are in control of an investment company's adviser and the company controlling such adviser, and that the Commission may make a determination relating to a period preceding such determination.

Phillips' application alleged that in 1962 Bertin C. Gamble and two affiliated companies had acquired control of Alleghany Corporation, which controls IDS, and of IDS. The Commission concluded, however, that the presumption under Section 2(a) (9) of the Act that the Gamble group, as the owner of less than 25 percent of Alleghany's stock, did not control that company had not been rebutted. In October 1962, John D. Murchison and Clint W. Murchison, Jr. and their associates, who had gained control of Alleghany in a 1961 proxy contest, sold 15 percent of the voting stock of Alleghany to the Gamble group and granted that group a right to purchase an additional 15-20 percent and to assume 2 seats on the 10-man board of directors. However, the Gamble group failed to reach an accord with Alan P. Kirby, Sr., a 33 percent stockholder of Alleghany who was engaged in efforts to regain control of Alleghany, and its contemplated succession to the Murchison group's holdings and positions did not materialize. The Commission also found that the record did not establish the existence of a claimed secret agreement between the Murchison and Gamble groups to transfer control to the latter or show that certain actions of Alleghany and IDS were attributable to

9 Investment Company Act Release No. 4595.

10 Investment Company Act Release No. 3596 (December 27, 1962).