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bank. The Commission understands that information regarding the operation of the Securities Acts Amendments of 1964 with respect to banks under the supervision of these agencies is discussed in their respective annual reports or is otherwise available from them.3 Exemptions From Registration
Section 12(h) of the Act authorizes the Commission, either by rules and regulations or by order upon application of an interested person, to grant a complete or partial exemption from the provisions of Sections 12(g), 13, 14, 15(d), or 16 if the Commission finds that because of the number of public investors, the amount of trading interest in the securities, the nature and extent of the activities of the issuer, the income or assets of the issuer, or otherwise, the exemption is not inconsistent with the public interest or the protection of investors.
During the fiscal year, 22 applications for complete or partial exemptions were filed; 21 applications filed during the prior year were pending. Of these 43 applications, 22 were granted,2 were denied, 7 were withdrawn, and 12 were pending at the end of the year. Exemptions were granted for a wide variety of reasons. Several mutual or cooperative organizations which did not meet all of the technical criteria of Section 12(g) (2) (F) for exclusion from registration under Section 12(g) were granted complete exemptions. Several issuers which were in the process of liquidation or of taking steps which would shortly terminate the public ownership of their securities, and whose registrations would therefore be shortly terminated were also exempted completely. Exemptions from Section 14(c) only were granted to several other issuers, only a small percentage of whose securities were held by the public and whose operations consisted solely of the receipt of rentals for property leased to affiliates.
Section 12(g) (2) exempts various types of securities from the registration requirements of Section 12(g) including the securities of an insurance company if (1) the company is required to and does file an annual statement conforming to that prescribed by the National Association of Insurance Commissioners (“NAIC”) with the insurance regulatory authority of its domiciliary state; (2) the company is regulated in the solicitation of proxies as prescribed by the NAIC; and (3) after July 1, 1966, the purchase and sale of securities issued by the company are subject to reporting and trading regulations by its
See 52nd Annual Report of Board of Governors of Federal Reserve System, pp. 225–226; Annual Report of Federal Deposit Insurance Corporation (1965) pp. 18-20.
• As required by the Act, exemptions were granted only after notice and opportunity for hearing. No hearings were requested as to any applications which were granted.
domiciliary state in substantially the same manner as provided by Section 16 of the Act.
The NAIC has prescribed a uniform annual reporting form which has been adopted in every State and the District of Columbia as the required form for insurance companies. As part of that form, the NAIC has developed a "stockholders' information supplement" to determine whether the company has furnished its stockholders with information substantially equivalent to that which the Commission would require under its periodic reporting requirements and proxy rules. The Commission has been informed that, as of the close of the fiscal year, the insurance regulatory agencies of every State and the District of Columbia had adopted rules and regulations requiring companies within their jurisdiction to file the supplement and any future revisions, and to comply with the proxy solicitation practices referred to therein. Many states also had enacted legislation specifically authorizing the adoption of such rules and regulations.
The NAIC also supported enactment of a model insider trading statute affording investor protections comparable to those of Section 16 of the Exchange Act. As of August 15, 1966, all of the States and the District of Columbia had passed such legislation.
Section 12(g) (3) authorizes the Commission to exempt foreign securities and certificates of deposit for such securities from the registration requirements of Section 12(g) if it finds that such action is in the public interest and is consistent with the protection of investors. Rule 12g3–1, adopted on September 15, 1964, exempted all foreign securities from registration until November 30, 1965. This exemption afforded the Commission time to study the problems of the registration of foreign securities traded in the over-the-counter market. On November 16, 1965, the Commission published for public comment proposed rules and forms for the registration of foreign securities under Section 12(g).
The Commission received many comments on the proposed rules, including many from persons and companies who would be directly affected by them and from representatives of foreign governments. Most of those who submitted comments suggested that the application of the requirements of the Exchange Act to foreign issuers which were neither listing shares on a United States securities exchange nor offering new shares in this country would be improper under international law. A number of comments indicated that in particular areas there would be technical difficulties in superimposing the requirements of the proposed rules on existing law to which issuers were subject in their country of incorporation.
Securities Exchange Act Release No. 7427.
After considering the comments, the Commission further postponed the application of Section 12(g) to foreign issuers, by amending Rule 12g3-1 to extend the exemption from registration to November 30, 1966. During the further period of exemption, the Commission continued its study of the adequacy of information now furnished by foreign issuers, the development and effects of the changing foreign law in this field, and the need for technical changes in the proposed rules because of foreign laws and practices. As of November 30, 1966, the exemption had not been extended further. The earliest date by which a foreign issuer would be required to register, if the Commission did not grant a further exemption, is 120 days after its first fiscal year ending after November 30, 1966.
To assist the Commission during the further exemption, and to provide information as promptly as possible to American investors, the Commission asked foreign issuers to furnish the Commission with certain information if they had in excess of $1 million of total assets and a class of equity securities with 500 or more holders (at least 300 of which are residents of the United States) at the end of a fiscal year ending after November 30, 1965. The information requested was that which issuers were required to publish under foreign law or to furnish to foreign stock exchanges, or which they distributed to their own security holders. The information so furnished would be available for public inspection.
On August 10, 1966, the Commission published a list of 80 foreign issuers which had furnished information voluntarily and 32 issuers which had not done so. The Commission will publish additional lists as additional companies furnish information. The Commission believes that these lists will be useful to brokers and dealers in making recommendations to their customers concerning the securities of foreign companies. Proposed Definitions Under the “Market-Maker” Exemption From Insider
Trading Provisions Section 16(d) of the Exchange Act, added by the 1964 amendments, exempts market-making transactions by broker-dealers from the profit recovery provisions of Section 16 (b) and the "short sale” and “sale against the box” provisions of Section 16(c). On June 16, 1966, the Commission proposed for public comment a new Rule 16d-1 defining certain terms in Section 16(d) and specifying conditions for the availability of the exemption."
The proposed rule would define the term “securities held in an investment account” as used in Section 16(d) to mean securities which a dealer has identified on his records as being held in an investment
? Securities Exchange Act Release No. 7867 (April 21, 1966).
account, securities acquired in other than market-making transactions and securities held by the dealer more than 5 business days after the dealer ceases to maintain a market in the securities. The acquisition of these securities would not be exempt from Section 16(b) even though made in a market-making transaction. The term "transactions made in the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market" (referred to in the rule as “market-making transactions”) would be defined to mean both retail and inter-dealer transactions in securities which are sold, or acquired and held for sale, in the ordinary course of business and incident to the establishment or maintenance of a market. The rule would require as a basis for exemption that the dealer maintain a continuous inter-dealer market in the securities on each business day for a period of at least 45 consecutive calendar days, including the day of the transaction for which exemption is claimed. At the close of the fiscal year, the Commission was considering the comments and suggestions which it had received. Disciplinary Action Against Broker-Dealers and Their Associated Persons
The 1964 amendments added several important provisions to Section 15 of the Exchange Act concerning disciplinary action against brokers and dealers and persons associated with them. For the first time, the Commission was authorized to proceed directly against and impose sanctions on individuals associated with broker-dealer firms. These sanctions include a suspension or a bar from being associated with a broker-dealer. The sanctions which the Commission may impose against broker-dealers were expanded to permit censure and suspension of registration for up to 12 months. The statutory disqualifications from being registered as or associated with a broker-dealer were expanded to include additional types of injunctions, convictions and violations.
During fiscal 1966, the Commission applied the new provisions in many instances. It instituted four proceedings solely against individuals associated with broker-dealers. Another such proceeding was pending at the start of the fiscal year. During the year, a respondent in one of the above proceedings was barred from further association with a broker-dealer. In proceedings in which broker-dealers as well as certain of their associated persons were named as respondents, 67 individuals were barred from further association with a broker or dealer, and 9 others were suspended from such association for varying periods of time. The Commission also suspended the registrations of six broker-dealer firms.
Regulation of Broker-Dealers Who Are Not Members of Registered Securities
Associations Prior to the 1964 amendments, broker-dealers registered with the Commission who were not members of the National Association of Securities Dealers, Inc. (NASD), or one of the principal exchanges, were not subject to any comprehensive regulation concerning qualifications, experience in the securities business, or fair business practices. A major objective of the amendments was “to insure that the Commission has the necessary authority to provide regulation of non-member brokers and dealers comparable to that imposed by (self-regulatory) associations on their membership, including the requirement that these non-member brokers and dealers pay fees which will compensate the Commission for this additional regulation.” 10
New subsections (8), (9), and (10) of Section 15(b) of the Exchange Act authorize the Commission to adopt rules and regulations prescribing standards of training, experience and other qualifications for such brokers and dealers and persons associated with them, as well as to adopt rules and regulations for non-member broker-dealers designed to promote just and equitable principles of trade, to provide safeguards against unreasonable profits or unreasonable rates of commissions or other charges, and in general to protect investors and the public interest and to remove impediments to and perfect the mechanism of a free and open market.
During the past fiscal year, the Commission continued to implement these provisions. In September 1965, the Commission adopted Rule 15b8–1 which, among other things, established qualification requirements for registered broker-dealers who do an over-the-counter business and who are not members of a registered securities association, and for their principals, salesmen and other associated persons." Subject to certain exemptions, every associated person engaged directly or indirectly in securities activities must now successfully complete a qualifications examination, and broker-dealers subject to the rule must file a personnel form for every such associated person with the Commission.
In January 1966, the Commission's general securities examination, administered by the NASD, was given for the first time. The examination covers a broad range of securities subjects, including corporate structure, financial statements and accounting theory, investment companies, the securities laws, details of underwriting, trading and distributions, and other Federal rules and regulations such as Regulations “T” and “U” of the Federal Reserve Board. By the end of the fiscal year, 3,315 examinations had been given in over 70 testing centers in
House Report No. 1418, 88th Cong. 2d Sess., p. 12.