ADMINISTRATION OF THE SECURITIES EXCHANGE ACT OF 1934 The Securities Exchange Act of 1934, as amended by the Securities Acts Amendments of 1964, provides for the registration and regulation of securities exchanges, the registration of securities listed on such exchanges and, under new Section 12(g), the registration of securities traded over the counter where the issuers of such securities have total assets in excess of $1 million and the securities constitute a class of equity securities held of record by at least 500 persons (until July 1, 1966, the minimum number was 750). It establishes, for issuers of securities registered under the Act, financial and other reporting requirements and regulation of proxy solicitations and, for directors, officers and principal security holders of such issuers, reporting requirements and restrictions on trading in the securities of their companies. The Act also provides for the registration and regulation of national securities associations and of brokers and dealers doing business in the over-the-counter markets, contains provisions designed to prevent fraudulent, deceptive and manipulative acts and practices on the exchanges and in the over-the-counter markets and authorizes the Board of Governors of the Federal Reserve System to regulate the use of credit in securities transactions. The principal purpose of the various statutory provisions is to ensure the maintenance of fair and honest markets in securities transactions on the organized exchanges and in the over-the-counter markets. REGULATION OF EXCHANGES AND EXCHANGE TRADING Registration and Exemption of Exchanges As of June 30, 1966, 14 stock exchanges were registered under the Exchange Act as national securities exchanges: American Stock Exchange Pacific Coast Stock Exchange Stock Exchange Pittsburgh Stock Exchange Three exchanges have been exempted from registration by the Commission pursuant to Section 5 of the Act: Colorado Springs Stock Exchange Richmond Stock Exchange Review of Exchange Rules and Procedures Rule 17a-8 of the Exchange Act provides that each national securities exchange must file with the Commission three copies of any proposed change in its rules not less than 3 weeks (or such shorter period as the Commission may authorize) before final action is taken by the exchange. These proposals are submitted for review to the Commission's Division of Trading and Markets. That Division also reviews, on a continuing basis, the existing rules, regulations, procedures, forms and practices of the national securities exchanges. The purposes of this review are to permit the Division to (a) ascertain the effectiveness of the application and enforcement by the exchanges of their own rules; (b) determine the adequacy of the rules of the exchanges, and of related statutory provisions and rules administered by the Commission, in light of changing market conditions, and (c) anticipate and define problem areas so that preventive or remedial steps can be taken. Most significant aspects of the rules and procedures of the national securities exchanges are subject to review by the staff in the course of a year. When problems occur, conferences are held to permit the exchange and the Division to reach satisfactory solutions. These conferences sometimes lead to studies of current rules and practices, or proposed exchange's performance, the staff communicated its views to the particular exchange and discussions were held between the staff of the Commission and the exchange to arrive at appropriate solutions. Commission Inspections of the Exchanges Pursuant to the regulatory scheme of the Act, the Commission actively oversees the performance by the national securities exchanges of their self-regulatory activities. As part of this program, the Office of Regulation in the Division of Trading and Markets conducts regular inspections of various phases of exchange activity. During the past year, it conducted two such inspections of the New York Stock Exchange and three inspections of the American Stock Exchange. These inspections covered such areas as specialist and registered trader surveillance, exchange procedures for investigation and inquiry into unusual market situations, and exchange inspections of member firms' office procedures. In addition, the Office of Regulation carried out general inspections of the Philadelphia-Baltimore-Washington, Boston and Pittsburgh Stock Exchanges. The inspection program enables the Commission to insure that the exchanges are complying with their self-regulatory responsibilities and to recommend improvements and refinements designed to increase the effectiveness of self-regulation. Where it appeared to the Commission's staff that revisions in internal procedures or policies were desirable in order to improve an exchange's performance, the staff communicated its views to the particular exchange and discussions were held between the staff of the Commission and the exchange to arrive at appropriate solutions. Proceedings Against San Francisco Mining Exchange During the fiscal year, the Commission issued a decision pursuant to Section 19 (a) (1) of the Exchange Act in which it held that it was necessary and appropriate for the protection of investors to withdraw the registration of the San Francisco Mining Exchange as a national securities exchange.1 The Commission found that over a period of years the Exchange had repeatedly neglected to enforce compliance by its members and by issuers of securities listed thereon with the reporting, insider trading and anti-fraud provisions of the Exchange Act and had lent its facilities to securities distributions made in violation of the registration requirements of the Securities Act of 1933. The Commission also found that officials of the Exchange had been personally involved in repeated violations of the securities acts. In rejecting the Exchange's request that it be given an opportunity to rehabilitate itself, the Commission pointed out that the Exchange had failed to avail itself of prior opportunities to take corrective measures, that it did not perform any signficant function as a trading market, and that an effective rehabilitation would in effect require the organization of an entirely new exchange. On June 20, 1966, the Exchange filed a petition for review of the Commission's order with the Court of Appeals for the Ninth Circuit. The Court has issued a stay of the Commission's order pending final determination of the Exchange's petition. Exchange Disciplinary Action Each national securities exchange reports to the Commission disciplinary actions taken against its members, member firms, and their associated persons for violation of any rule of the exchange or of the Securities Exchange Act or any rule or regulation thereunder. During the fiscal year, eight exchanges reported 133 such actions, including impositions of fines in 44 cases ranging from $25 to $10,000, with total fines aggregating $68,575, and the suspension from membership of 14 1 Securities Exchange Act Release No. 7870 (April 22, 1966). individuals and 9 member organizations. These exchanges also reported the imposition of various sanctions against 65 registered representatives and employees of member firms. In addition, a number of informal staff actions of a cautionary nature were reported by several exchanges. REGISTRATION OF SECURITIES ON EXCHANGES Unless a security is registered on a national securities exchange under the Securities Exchange Act or is exempt from such registration it is unlawful for a member of such exchange or any broker or dealer to effect any transaction in the security on the exchange. In general, the Act exempts from registration obligations issued or guaranteed by a state or the Federal Government or by certain subdivisions or agencies thereof and authorizes the Commission to adopt rules and regulations exempting such other securities as the Commission may find necessary or appropriate to exempt in the public interest or for the protection of investors. Under this authority the Commission has exempted securities of certain banks, certain securities secured by property or leasehold interests, certain warrants and, on a temporary basis, certain securities issued in substitution for or in addition to listed securities. Pursuant to Section 12 of the Exchange Act, an issuer may register a class of securities on an exchange by filing with the Commission and the exchange an application which discloses pertinent information concerning the issuer and its affairs. Information must be furnished regarding the issuer's business, its capital structure, the terms of its securities, the persons who manage or control its affairs, the remuneration paid to its officers and directors, and the allotment of options, bonuses and profit-sharing plans, and financial statements certified by independent accountants must be filed as part of the application. Form 10 is the form used for registration by most commercial and industrial companies. There are specialized forms for certain types of securities, such as voting trust certificates, certificates of deposit and securities of foreign governments. STATISTICS RELATING TO SECURITIES ON EXCHANGES Number of Issuers and Securities As of June 30, 1966, a total of 2,578 issuers had 4,220 classes of securities listed and registered on national securities exchanges, of which 2,958 were classified as stocks and 1,262 as bonds. Of these totals 1,445 issuers had 1,648 stock issues and 1,161 bond issues listed and registered on the New York Stock Exchange. Thus, 56.1 percent of the issuers, 55.7 percent of the stock issues and 92 percent of the bond issues were on the New York Stock Exchange. Table 4 in the appendix to this report contains comprehensive statistics as to the number of securities issues admitted to exchange trading and the number of issuers involved, as of June 30, 1966. During the 1966 fiscal year, 161 issuers listed and registered securities on a national securities exchange for the first time, while the registration of all securities of 105 issuers was terminated. A total of 326 applications for registration of securities on exchanges was filed during the year. Market Value of Securities Available for Trading The market value on December 31, 1965, of stocks and bonds, both listed and unlisted, admitted to trading on one or more stock exchanges in the United States was approximately $707 billion. There is no duplication of issues between the New York and American Stock Exchanges. The figures for all other exchanges are for the net number of issues appearing only on such exchanges, excluding the many issues on them which were also traded on one or the other of the New York exchanges. The number and market value of issues as shown below exclude those suspended from trading and a few others for which quotations were not available. The number and market value as of December 31, 1965, of preferred and common stocks separately were as follows: • Stocks admitted to unlisted trading privileges only or listed only on exempted exchanges. The 3,067 preferred and common stock issues represented over 12.2 billion shares, of which 11.7 billion were included in the 2,900 issues listed on registered exchanges. |