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Applications filed with and acted upon by the Commission under the Investment

Company Act of 1940 during the fiscal year ended June 30, 1962


Subject involved



ing July 1, 1961

PendClosed ing

June 30, 1962

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Definition of controlled person.. 3 and 6.

Status and exemption... 7(d).

Registration of foreign investment companies. 8(1)

Termination of registration. 9, 10, 16..

Regulation of affiliations of directors, officers, em.

ployees, investment advisers, underwriters and

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

companies. 11, 25.

Regulation of security exchange offers and reorgani

zation matters. 17

Regulation of transactions with affiliated persons.-18, 19, 21, 22, 23... Requirements as to capital structures, loans, distri

butions and redemptions, and related matters. 20, 30.

Proxies and reports...
Regulation of lace-amount certificate companies..

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

The Commission denied an application by Investors Diversified Services, Inc. (“IDS”)* for an exemption from Section 18(j) (1) of the Act which prohibits the issuance by a registered face-amount certificate company of non-voting shares of stock. IDS has outstanding some 879,000 shares of non-voting stock and 574,540 shares of voting stock and, in order to effect a 10-for-one split of both classes of stock, an exemption order was required as to the non-voting stock.

The Commission noted that the holders of the voting stock, who owned only 39.52% of the proprietary interest in the company, possessed 100% of the voting power, thus creating an inequitable distribution of voting power. Applicant contended that since the stock split would result in lowering the market price of the stock, which ranged from $181 to $310 per share in 1961, it would create a broader and more stable market. However, the Commission noted that the split would also potentially enlarge the absolute number of shareholders without voting rights, thereby furthering an inequitable distribution of control contrary to the aims and purposes of the Act.

Commissioner Frear, in a separate opinion, concured in the denial of the application for the stock split because it carried no assurance that the non-voting stock would be eliminated to carry out the "basic reforms of providing equal voting rights."

In a dissenting opinion, Commissioner Whitney expressed the view that (1) the Act does not require the elimination of the non-voting stock of IDS which was outstanding on the effective date of the Act,

4 Investment Company Act Release No. 3474 (April 27, 1962).

and (2) the stock split would only be a technical and formalistic issuance of shares which would not have any aggravating effect on the existing distribution of voting power. He concluded that an exemption was warranted under the statutory pattern contemplating exemptions where the result would not be inconsistent with the policies and purposes of the Act and where the adverse effect on the market attributable to the existence of a relatively small supply of IDS shares, coupled with a high unit price, would be relieved.

On June 11, 1962, pursuant to the provisions of Section 25(b) of the Act, the Commission invited interested persons to submit their views with respect to the fairness of a plan of recapitalization proposed by IDS under which each share of non-voting stock would become a share of voting stock. As of the end of fiscal 1962 no definitive action had been taken by the Commission.

During the fiscal year applications were filed pursuant to Section 2(a) (9) of the Act by shareholders of Fundamental Investors, Inc., Investors Mutual, Inc., and Television-Electronics Fund, Inc., registered open-end investment companies, alleging that certain directors who were represented to be unaffiliated with the respective investment advisers in fact had been and were now controlled by such investment advisers. Prior to ordering a hearing on the factual questions raised by the applications, the Commission directed that the parties and other interested persons file briefs and reply briefs with respect to certain specified common legal issues raised by the applications. These issues relate to the Commission's jurisdiction, , power and duty under Section 2(a) (9) to determine that a natural person, e.g., a director of a registered investment company, is controlled, and if so, under what circumstances, for what purposes and with what effect. In addition the Commission requested that the briefs consider the effect on its jurisdiction, if any, of the pendency in courts of competent jurisdiction of suits allegedly involving the same issues and parties, and also whether an investment company shareholder is an “interested person” within the meaning of Section 2(a) (9) so as to have standing to file applications under that Section. Oral argument was held on these issues on June 14, 1962, and the matter was under advisement at the close of the fiscal year.

After publication of the Commission's notice of the filing of the above applications, an application was filed by a shareholder of AxeHoughton Fund B, Inc., seeking a determination by the Commission pursuant to Section 2(a) (9) that certain directors of that investment company are controlled by other directors who also allegedly con

5 Investment Company Act Release No. 3485. o Investment Company Act Release No. 3468 (April 13, 1962).

trolled the investment company. Subsequent to the close of the fisca] year this application was dismissed by the Commission on the ground that it failed to state a basis for the requested determinations under Section 2(a) (9). Applicant thereafter filed a petition to review the Commission's action in the Court of Appeals for the Second Circuit. The petition was dismissed on October 5, 1962.

The Commission's Annual Report for fiscal 1961 referred to an application filed by The Prudential Insurance Co. of America for exemption from the Act or, in the alternative, for exemption from certain provisions thereof, in connection with its proposed plan for the sale of variable annuity contracts. During fiscal year 1962 the hearing in this matter was completed, briefs were filed by the interested parties, and oral argument was had before the Commission. At the end of the fiscal year the matter was awaiting a decision by the Commission.

7 27th Annual Report, p. 152.


OF 1940

The Investment Advisers Act of 1940 requires the registration of persons engaged for compensation in the business of advising others with respect to securities. Certain advisers are exempt from the requirement of registration, including those who advise only investment companies or insurance companies and those who, within the last 12 months, had fewer than 15 clients and who do not hold themselves out generally to the public as investment advisers. Furthermore, the registration requirements do not apply to an adviser whose investment advice is given only to persons resident in the state in which he maintains his principal place of business, as long as the advice does not concern securities listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange.

As discussed in the last Annual Report 1 Section 206 of the Act, which prohibits certain unlawful practices by investment advisers, was amended in September 1960 by the addition of subsection (4). That subsection prohibits any investment adviser from engaging in fraudulent, deceptive or manipulative acts or practices and gives the Commission authority, by rules and regulations, to define and to prescribe means reasonably designed to prevent such acts and practices. In accordance with this provision the Commission during the fiscal year adopted Rule 206(4)-1, effective January 1, 1962, which defines certain advertisements by investment advisers as fraudulent, deceptive or manipulative. It also adopted Rule 206 (4)-2, effective April 2, 1962, which requires an investment adviser who has custody of funds or securities of any client to segregate them, maintain them in the manner provided in the rule, and to comply with other conditions specified in the rule.

Investment advisers who also effect transactions as brokers and dealers must disclose any interest they may have in transactions effected for clients if acting as an investment adviser with regard to such transactions. The Act prohibits any investment adviser not exempt from registration from basing his compensation upon a share of the capital gains or appreciation of his client's funds. The Act also makes it unlawful for any such investment adviser to enter into, extend or renew any investment advisory contract or to perform such contract if the contract provides for compensation to the investment adviser on the basis of a share of capital gains or capital appreciation of the funds or any portion of the funds of the client or fails to provide that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract.

1 27th Annual Report, p. 159. ? Investment Advisers Act Release No. 121. a Investment Advisers Act Release No. 123.

Prior to the 1960 amendments, the Act did not require investment advisers to keep and preserve books and records, nor was the Commission empowered to inspect books and records kept by investment advisers. Section 204 of the Act, as amended, now requires every investment adviser who is not exempt from registration to make, keep and preserve such books and records as may be prescribed by the Commission and empowers the Commission to inspect such books and records. In accordance with this provision, the Commission adopted Rule 204-2, effective July 1, 1961,4 specifying the books and records to be maintained by investment advisers.

Inspection procedures have been revised to obtain information concerning compliance with the new rules. These rules are more fully discussed in Part III of this report.

Investment advisers who violate any of the provisions of the Act are subject to appropriate administrative, civil or criminal remedies. With respect to administrative remedies, the Act provides, in Section 203(d), that the Commission shall deny, revoke, or suspend for not more than 12 months, the registration of an investment adviser if it finds that such action is in the public interest and that the investment adviser or any partner, officer, director or controlling or controlled person of the investment adviser is subject to a specified disqualification. These disqualifications include willful misstatements in an application or report filed with the Commission, the existence of a conviction or injunction based on or related to specified types of misconduct, willful violation of any provision of the Securities Act, Securities Exchange Act or Investment Advisers Act or any rule or regulation thereunder, or aiding and abetting any other person's violation of such provisions, rules or regulations.

At the close of the fiscal year, 1836 investment advisers were registered with the Commission. The following tabulation contains statistics with respect to registrations and applications for registration during fiscal year 1962:

4 Investment Advisers Act Release No. 114.

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