1940: Securities And Exchange Commission

New Investment Company and Investment Advisers Acts.

The study by the Securities and Exchange Commission of investment trusts and investment companies, conducted under express authority contained in the Public Utility Holding Company Act of 1935, led to the unanimous enactment by both houses of the Congress during 1940 of the Investment Company Act and the Investment Advisers Act. The first Act provides for the registration and regulation of all types of investment trusts and investment companies. The second Act provides for the registration of all persons engaged in the investment advisory business and prescribes prohibitions against certain abuses which were found to exist.

The passage of these two Acts substantially expanded the scope of the Commission's work. There are now seven separate statutes administered by the Commission. In addition to the two 1940 statutes, this legislation provides for the supervision of the registration of security issues and the suppression of fraudulent practices in the sale of securities (Securities Act of 1933), the supervision and regulation of transactions and trading in outstanding securities, both on stock exchanges and in the over-the-counter markets (Securities Exchange Act of 1934), and the regulation or supervision of public utility holding company systems (Public Utility Holding Company Act of 1935) and trust indentures (Trust Indenture Act of 1939). Also, the Commission participates in corporate reorganizations by preparing advisory reports on plans of reorganization for the courts and investors. (Chapter X of the National Bankruptcy Act).

Changes in Administration Policies.

During the year 1940, the Commission took several significant steps to perfect the administration of the various Acts under its jurisdiction. In general, these efforts were directed toward a simplification of the Commission's procedure, forms and regulations. In order to expedite the handling of applications and declarations involving financial transactions under the Holding Company Act, the Commission adopted a new procedure which makes hearings and findings of fact unnecessary on the majority of such applications and declarations. Formal administrative hearings are now necessary only where, from a review of the application and declaration by the staff, it is apparent that substantial difficulties are presented. The Commission is constantly studying the rules, regulations and forms adopted under the Holding Company Act to achieve the simplest requirements consistent with a vigorous administration thereof. For example, early in 1940, the Commission replaced all its outstanding forms for applications and declarations under that Act by a single form.

Further, the Commission simplified its regulations relating to the exemption of securities up to and including $100,000 from the registration requirements of the Securities Act. To avail itself of the exemption, a domestic issuer needs only to send to the Commission's nearest regional office a letter notifying that office of its intention to sell, together with any selling literature it may plan to use. Thus, the Commission's administrative emphasis is shifted from the disclosure requirements of the Securities Act to the fraud prevention provisions.

New Experimental Units.

In June 1940, the Commission announced the establishment of an experimental unit in its San Francisco Regional Office to assist prospective issuers of securities, and to advise them and their representatives on any problems arising in connection with their registration statements. In November 1940, the Commission announced the extension to its other regional offices of the facilities for assistance to registrants along the lines provided in the San Francisco Regional Office. At the same time the Commission announced that complete registration facilities would be provided in the San Francisco Regional Office and the Cleveland Regional Office for an experimental period. Thus, registrants in those regions may file and have their registration statements examined in the regional office instead of in Washington.

During the past year, the Commission gave particular emphasis to the administration of the integration and corporate simplification provisions of the Holding Company Act. Integration proceedings were commenced with respect to nine major utility systems, comprising roughly 58 per cent of the total consolidated assets of all systems registered under the Act. Simplification proceedings were commenced in five instances.

Violations of Holding Company Act and Other Acts.

The Commission carried on several investigations of alleged violations of Section 12(h) of the Holding Company Act which prohibits registered holding companies and their subsidiaries from making any contributions to political groups or in connection with any political office. Most important of these investigations involved the Union Electric Company of Missouri and certain other subsidiaries of The North American Company. Three former officials of Union Electric Company were indicted for perjury in connection with the Commission's investigations. Two of those indicted pleaded guilty and the third stood trial and was convicted. Evidence developed by the Commission's investigators and presented during the perjury trial showed that over a period of years the company had made political contributions from a slush fund of over half a million dollars, built up from kick-backs and rebates received from attorneys and contractors, cash refunds on insurance policies and padded expense accounts of certain employees.

In the field of enforcement, the Commission obtained indictments against 234 individuals and corporations and injunctions against 118 individuals and corporations for violations of the Acts administered by it. There were 145 defendants convicted for violation of the Acts.

Securities Transactions.

During the fiscal year ended June 30, 1940, $1,787,000,000 of securities became effective under the Securities Act, bringing the total gross amount becoming effective since the organization of the Commission to more than $17,065,000,000. The Commission examined 1,359 offering sheets, relating to oil royalties, involving an aggregate offering price of more than $31,000,000. It also examined more than 300 prospectuses or letters of notification covering securities totalling more than $20,000,000 which were exempted from registration under the rules of the Commission covering certain issues not in excess of $100,000. Seventeen stop orders were issued during the year suspending the effectiveness of registration statements filed under the Securities Act.

There were 2,408 issuers having securities effectively registered on national securities exchanges as of June 30, 1940. There were 2,747 stock issues and 1,411 bond issues registered on such exchanges, while 1,194 stock issues and 340 bond issues were admitted to unlisted trading privileges. Sales of stocks and bonds on the twenty national securities exchanges amounted to $13,462,471,000 during the 1940 fiscal year. There were 6,555 registrations of brokers and dealers in effect on June 30, 1940.

Declarations covering $1,002,051,051 principal amount of security issues became effective under the Holding Company Act during the year ended June 30, 1940, compared with $1,104,574,000 for the preceding year. This brought the total of new securities issued since the effective date of the Act, December 31, 1935, to $2,885,932,502. At June 30, 1940, the registered holding companies represented 55 separate public utility systems, comprising 144 registered holding companies and including 1,493 individual holding, sub-holding and operating companies. The consolidated assets of these companies totalled around 14½ billion dollars.

Dealings With Corporations.

The Commission became a party in 47 corporate reorganizations under Chapter X of the Bankruptcy Act, as amended. This brought the total number of corporate reorganizations in which the Commission has become a party to 134.

The problem of maintaining arm's-length bargaining and competitive conditions in the sale and distribution of securities of registered public utility holding companies and their utility subsidiaries was under examination during the year. Just before the close of 1940, the Commission made public a report prepared by the staff of its Public Utilities Division with respect to this problem. At the same time, the Commission sent a letter to the registered public utility holding companies, public utility commissioners, and others asking for their comments and suggestions on the report and recommendation of the staff that a rule be adopted requiring generally that competitive bidding be resorted to in the sale and distribution of securities of registered public utility holding companies and their subsidiaries.

In December, the Commission made public a report on its investigation into the falsifications of the accounts of McKesson & Robbins, Inc. Included in this report was a summary of the Commission's findings and conclusions.

On June 4, 1940, Sumner T. Pike, of Maine, was appointed a member of the Commission to fill the vacancy created by the resignation of George C. Mathews. Edward C. Eicher, of Iowa, was reappointed Commissioner on July 11, 1940 and on July 3, 1940, Commissioner Jerome N. Frank, of New York, was re-elected Chairman of the Commission for the period ending June 30, 1941.

The Commission's regional offices are located in New York, Boston, Atlanta, Cleveland, Chicago, Fort Worth, Denver, San Francisco and Seattle. See also articles on BUSINESS and BANKS AND BANKING.