companies newly listing securities to publish quarterly statements of earnings as well. The New York Stock Exchange also requires listed companies to solicit proxies for all meetings of shareholders. The American Stock Exchange is in the process of extending the same requirement to all of its issuers of listed issues. Certain of the regional exchanges provide the same or similar protections.

By contrast, comparable protections in the over-the-counter market are provided for only limited classes of securities and, for some of those, only in part. A vast number of issuers of over-the-counter securities are not required to file reports or to furnish their shareholders with adequate information when proxies are solicited, nor are they subject to insider-trading controls. A limited number of issuers are subject to reporting requirements only, by reason of a prior public offering, and a limited number are required to supply shareholders with annual financial statements in order to have securities eligible for the retail quotation lists of the NASD, but even these partial protections apply to securities comprising only a small part of the over-the-counter market. Viewed as a whole, that market presents a striking regulatory disparity with exchange markets.

The disparity and the need to eliminate it have long been recognized. When Federal securities laws were first enacted, Congress itself expressly provided for "comparable protection" and various studies since then, which the Special Study has confirmed, have demonstrated the need. Legislation to accomplish the desired end has been proposed in the past, but has failed of adoption at least in part because of unresolved questions as to its scope of coverage. Indeed, the open questions in this area cannot be questions of principle as to whether or not the protections are desirable, but only questions of where lines should be drawn in the light of practicalities.

The Special Study attempted to assemble data that would be helpful in determining the scope of remedial legislation. It is established law that an offering may be "public" for purposes of the registration requirements of the Securities Act, whatever the number of persons involved, if the circumstances are such that the protections afforded by registration are needed. By parallel reasoning, if securities are already traded in public markets, the protections of sections 13, 14, and 16 theoretically should not depend on the size of the issuer or the number of its security holders. Nevertheless, practicalities of administration made it advisable to seek data bearing on the number of companies that would be affected by various coverage criteria and some of the characteristics of those that might be included and excluded.

A comprehensive survey of issuers of over-the-counter stocks—more comprehensive than any before attempted-leads to the conclusion that a number-of-shareholders criterion of coverage (the kind of standard principally adopted in prior legislative proposals) is both most theoretically sound and most workable. Comparisons of corporate characteristics and numbers of shareholders of the corresponding issuers show that a clear relationship exists between shareholder size and the apparent degree of trading activity indicated by numbers of transfers of record and frequency of broker-dealer quotations. Little, if any, relationship between either of the foregoing and asset size is apparent. In the light of the detailed data set forth, including estimates of the total number of companies affected, a coverage stand

ard of 300 shareholders is indicated. Administrative needs, however, suggest a phased program of reaching that standard gradually by at first adopting a higher figure and progressively lowering it as administrative means are made available.

The potential impact of section 16(b), the insider-trading provision, on broker-dealers who both maintain dealer markets in securities and sit on the corresponding corporate boards of directors appears to have been greatly exaggerated. Only a small segment of all over-thecounter issues are involved; many broker-dealers, if faced with the choice of resigning as director or abandoning a trading market, would doubtless choose to resign rather than cease trading; and except in a very rare case it is difficult to conceive of any individual's indispensability as both director and market maker. Nevertheless, if such indispensability can be affirmatively shown, the Commission should be empowered to grant exemption from section 16(b). A general exemption for marketmaking transactions would be unwarranted.

Over-the-counter securities which are made subject to sections 13, 14, and 16 will be a special and distinct segment of over-the-counter securities for many regulatory and business purposes. To distinguish them appropriately, a designation such as "OTC listed" should be officially recognized. Issuers not subject to mandatory compliance with sections 13, 14, and 16 should be permitted to have their securities "OTC listed" by electing to comply.

Apart from extending existing protections for listed securities to over-the-counter securities, improving the existing protections in certain respects and wider dissemination of officially filed information would be desirable in any event.

The Special Study concludes and recommends:

1. Sections 13, 14, and 16 of the Exchange Act should be extended to issuers of unlisted securities, in the first instance to all issuers having 750 or more equity security holders of record and/or known beneficial holders, and, thereafter as rapidly as feasible to all issuers having 300 or more such holders, subject to the exemptions and exemptive powers recommended below. An issuer once subject to sections 13, 14, and 16 should continue to be so despite the fact that its number of equity security holders falls below 300 from time to time and should be relieved of compliance only after that number falls to and has remained at or below 200 for (say) 2 years, and thereafter only so long as the number remains below 300.

2. Section 15(d) of the Exchange Act is based on the principle that an issuer entering the public markets for capital should undertake continuing obligations to investors in those markets, if the amount of the issue (plus other securities of the same class) is at least $2 million. Under the recommendation made above to extend sections 13, 14, and 16 to all over-the-counter issuers that have 300 equity security holders a different and more embracing practical standard will become applicable, whether or not the issuer undertakes a new public offering. Since a phased approach to the ultimate coverage recommended is proposed on purely practical grounds, however, and since it does not appear to be impractical immediately to apply the ultimate standard to all issuers hereafter making a public offering, section 15(d) should

be amended to apply the protections of Sections 13, 14, and 16 to every issuer making a public offering and thereafter having 300 or more equity security holders. Issuers of future regulation A issues should be similarly provided for by appropriate amendment of the applicable regulations.

3. Since extension of sections 13, 14, and 16 to over-the-counter issuers will make their securities prima facie eligible for unlisted exchange trading privileges under section 12(f)(3) and it would be better to leave determination of the principal market in which an issue is traded to competition among markets and issuers' preferences, section 12(f) (3) of the Exchange Act should be concurrently repealed. Rule 12f-4, which exempts from sections 13, 14, and 16 issuers of issues granted unlisted trading privileges pursuant to section 12(f) (1), should be amended so that the exemption will be available only where the number of shareholders is less than the prevailing criterion for over-the-counter securities.

4. In principle, the recommended legislation should not exempt any category of issuers merely because they file reports or are otherwise regulated under other laws, unless such reports or other regulations are clearly designed for the protection of investors (as distinguished from consumers, policyholders, depositors or other categories) and do in fact provide protections reasonably equivalent to those of the Exchange Act. The legislation should expressly exempt only securities already defined as "exempted securities" by section 3(a)(12) of the Exchange Act (essentially Federal, State, and municipal securities) and securities of nonprofit organizations, but the discretionary exemptive power granted to the Commission by section 3(a) (12) should be available to enable it to exempt other categories upon a finding that their inclusion is not required in the public interest or for the protection of investors. The Commission should, as is now the case with respect to listed securities, permit any issuer filing data with any other Federal or State regulatory agency reasonably comparable to those required under section 13, to file copies of such data in lieu of data otherwise required under section 13.

5. There is no need for a general and broad exemption from section 16(b) requirements (relating to "insider" trading) in respect of broker-dealers making markets in securities of issuers on whose boards of directors they are represented. Entirely apart from the merits of broker-dealers' services on corporate boards generally, the combination of making a market in an issue (as "sponsor" or otherwise) and representation on the board of the issuer appears to be in most, if not all, circumstances an unnecessary one; and when consideration is given to the potential conflicts of interest inherent in the combination,1 the balance clearly does not lie in favor of a general and broad exemption. To provide for any truly exceptional circumstances or instances (possibly, e.g., for a limited period of time after a first public offering and/or in the case of geographically restricted markets) the Commission should be empowered to provide limited exemptions on an affirmative showing both of unique need of the issuer or class of issuers and necessity and appropriateness in the public interest and for the protection of investors.

1 See ch. III.F. (pt. 1).

6. Since it is contemplated that some issues of securities in over-the-counter markets will, and others will not, be required to comply with sections 13, 14, and 16, the distinction will and should become a highly important one for many purposes; see, for example, paragraph 5 of conclusions and recommendations under chapter III.B., paragraph 1 under chapter IV.F., and conclusions and recommendations under chapters VII and X. The term “OTC listed" is suggested as a distinguishing hallmark for any over-thecounter security the issuer of which is required to comply with sections 13, 14, and 16. The legislation should expressly permit any other issuer to elect to comply, and thereby to bring its securities within the "OTC-listed" category.

7. Both in their present application to exchange-listed securities and in their proposed application to "OTC-listed" securities, sections 13, 14, and 16 or the regulations thereunder should be amended to provide improved protections in certain particulars: (a) Except in extraordinary circumstances, to be defined, financial statements included in reports to stockholders accompanying or preceding proxy solicitations should be required to be prepared and presented on substantially the same basis as the financial statements in officially filed reports; (b) appropriate rules with respect to broker-dealer transmission of proxy-soliciting material should be adopted by the NASD and section 14(b) of the Exchange Act should be amended to empower the Commission both to compel the giving and to control the manner of giving proxies on customers' securities, both listed and unlisted; (c) section 16(b) should be amended to permit recovery of shortswing profits of a broker-dealer firm where one of the principals is a director, "reversing" Blau v. Lehman.

8. If disclosure of information is fundamental in Federal securities regulation, the widest possible dissemination and use of filed information will obviously best serve the purposes of disclosure. In light of modern techniques for duplicating and communicating the printed word, it would seem that dissemination and not mere filing should be required in many instances. For example, just as there are now unofficial services that regularly distribute summaries of data concerning individual securities, it would seem feasible to require officially filed information to be presented in form for inexpensive duplication and distribution. It would also seem possible to require that copies be filed in appropriate Commission or NASD offices and/or that brokerdealers making markets or recommending purchases have copies on file or actually distribute them to customers in stated circumstances. The technical and economic feasibility of such measures and the advances in investor protection that they would make possible should receive immediate and continuing study by the Commission and the self-regulatory agencies.

C. CORPORATE PUBLICITY AND PUBLIC RELATIONS

Planned publicity or "public relations" is a conspicuous feature of the American scene and, not surprisingly, its protagonists include many publicly held companies. The Special Study has concerned

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itself only with its impact on the securities markets and public in

vestors.

Public relations activities can act as a valuable supplement to the disclosures required by the securities acts, for presumably the highest form of full disclosure-"truth in securities" is that which not only reaches but is understood by the widest public. During recent years, more and more corporations have begun to provide their stockholders with adequate periodic financial reports and to make prompt public disclosure of important corporate developments. But at the other end of the spectrum, where publicity perverts the concept of full disclosure, where the purpose or effect is manipulative, the impact of public relations becomes a matter of concern.

Although many companies and their financial public relations firms publicists who specialize in communicating between issuers on the one hand and the financial press, the investment community, and stockholders on the other-conduct their activities with restraint and propriety, nevertheless a segment of this industry has been involved in the dissemination of inaccurate and misleading information. Even for companies subject to full reporting requirements, there are opportunities for fanciful publicity in the intervals between official reports, or by drowning out low-decibel reports through modern high-decibel publicity techniques. For companies outside the reach of official reporting requirements, uncontrolled publicity may be the only source of information or misinformation available to public investors and the investment advisers and broker-dealers upon whom they rely, and the opportunities and dangers are particularly great.

The intensive examination by the Special Study of the public relations activities of a few publicly held corporations demonstrates the potential impact of corporate publicity. Given a generally bullish market or existing public interest in a particular company or industry, a well-planned publicity campaign can have an immediate and dramatic effect on the price of a security. Examples were found in which a single carefully "placed" article had the effect, within a few days, of trebling the price of a stock with a thin floating supply. The business editor of a national publication for several years made a practice of purchasing the stock of small companies which the publication was about to write up, and selling his holdings shortly after the article appeared, usually at a considerable profit.

The purposes of issuers or their public relations men in disseminating corporate publicity vary considerably, ranging from purposes seemingly unconnected with security prices, such as product promotion or creating a favorable corporate "image," to seeking an "equitable evaluation" of the company's stock in the market in order to be able to obtain financing or make acquisitions more advantageously. Publicity may also be distributed for the personal gain of company officials or to the personal advantage of public relations men who acquire securities of their clients either as part of their fee or otherwise. The Special Study found instances of persons in these categories selling substantial amounts of stock shortly after the public announcement of favorable corporate developments.

The effectiveness of planned publicity-and, in the worst forms, its insidiousness-lies in its snowballing potential. The well-planned story gains momentum and scope as it travels from management to publicist to analyst to financial writer (or sometimes writer to analyst)