1941: Securities And Exchange Commission

Administration of the Public Utility Holding Company Act.

The past year has witnessed important developments in the administration by the Securities and Exchange Commission of the Public Utility Holding Company Act of 1935. Substantial advances were made in securing compliance by the major holding company systems with the integration and simplification provisions of the Act. Further progress also was made in improving the financial structure of companies in holding company systems, as an incident to the exercise of jurisdiction over security issues and of supervision over dividend policies and inter-company payments. Other principal activities included the requirement of competitive bidding in connection with the sale of securities subject to the provisions of the Act, and the requirement that holding companies pay the entire salary expenses of such of their officers as are also officers of service companies and of operating companies.

The Public Utility Holding Company Act of 1935 is designed to eliminate abuses and provide a greater degree of protection for investors and consumers in the financing and operation of public utility holding companies. It provides for the registration of holding companies; elimination of uneconomic holding company structures; supervision of security transactions of holding companies and their subsidiaries; supervision of acquisitions of securities and utility assets by holding companies and their subsidiaries; and the supervision of payment of dividends, solicitation of proxies, inter-company loans, and service, sales and construction contracts. The Act provides for the simplification of the corporate structures of utility holding companies and the confinement of their business to economically integrated units. The Commission has no power to regulate the rates of public utilities.

At June 30, 1941, there were 147 public utility holding companies registered under the Holding Company Act. The consolidated assets of these companies exceeded $15,000,000,000. The 147 registered holding companies constituted 53 public utility holding company systems, which included 1,457 holding, subholding, and operating companies.

At the close of the fiscal year (June 30, 1941) proceedings involving integration or corporate simplification, or both, were pending with respect to 14 holding company systems, having consolidated assets aggregating over $10,000,000,000, or 67 per cent of the consolidated assets of all registered holding company systems.

During the past fiscal year applications covering more than $1,065,000,000 of new securities became effective under the Holding Company Act. This brought the total of new securities issued since the effective date of the Act, Dec. 1, 1935, to more than $3,951,000,000.

Protection of Investors.

In addition to the Holding Company Act, the Commission administers the Securities Act of 1933, Securities Exchange Act of 1934, Trust Indenture Act of 1939, Investment Company Act of 1940, Investment Advisers Act of 1940, and has certain duties to perform under Chapter X of the National Bankruptcy Act. None of the statutes administered by the Commission guarantee investors against loss. Certain powers are given to the Commission to control the issuance of securities by public utility holding companies and their subsidiaries under the Holding Company Act, but as regards all other issues of securities, the Commission can merely compel the disclosure of information in the light of which an investor may adequately form his own opinion.

The basic purpose of the Securities Act is to furnish complete and accurate information to prospective investors regarding new issues of securities publicly offered for sale and to afford protection against fraud and misrepresentation. This is accomplished through the medium of a registration statement, which must be filed by the issuer of each new security issue offered for sale to the public in interstate commerce. The Commission has the power to refuse or suspend registrations in cases where the information given is incomplete or misleading. The Act provides for civil and criminal liability on the part of the issuers and others for violations connected with the sales of securities.

The Securities Exchange Act has a threefold purpose. First, it is designed to prevent unfair practices in the securities markets. Second, it aims to make available currently to the public sufficient information concerning the management and financial condition of corporations whose securities are traded in the securities markets to enable investors to act intelligently in handling their investments and in exercising their rights as security holders. Third, the Act regulates the use of credit to finance the trading in securities.

The Trust Indenture Act prescribes certain standards for trust indentures designed to bring indenture trustees up to the same high standard of diligence and loyalty now observed by the more conscientious trust institutions. The Investment Company Act provides for the regulation of all types of investment trusts and investment companies. The Investment Advisers Act provides for the registration of all persons engaged in the investment advisers business and prescribes prohibitions for certain abuses which have been found to exist. Under Chapter X of the National Bankruptcy Act, the impartial and expert administrative assistance of the Commission is made available to the courts in the solution of the complex problems presented by corporate reorganizations under that Chapter of the Act.

Investigation of Complaints and Criminal Proceedings.

The Commission annually receives and replies to thousands of complaints from the public with respect to alleged violations of the statutes which it administers. Each complaint receives careful consideration. If, after a preliminary inquiry, it appears to the Commission that one of the statutes has been violated, an investigation is initiated in an effort to determine the facts. Much of this investigative work is conducted through the Commission's regional offices. At the beginning of the past fiscal year the enforcement section had pending 696 investigations, and during the year 484 additional investigations were initiated. Out of this total of 1,180 cases, 548 were disposed of, leaving 632 cases pending at June 30, 1941. The Commission instituted 34 civil proceedings during the year, including 28 injunctive actions brought against 82 persons to restrict them from fraudulent and otherwise illegal practices in the sale of securities.

As to criminal proceedings, the Commission up to July 1, 1941, had referred to the Department of Justice 329 cases, including 52 cases which were referred during the past fiscal year. Since the organization of the Commission in 1934, a total of 1,852 defendants have been indicted in 260 cases, including 27 cases which have been referred to the Post Office Department. Convictions have been obtained against 739 defendants in 200 cases, representing 93 per cent of the 213 cases which have been disposed of as to principal defendants.

Registration of Securities.

Securities effectively registered under the Securities Act during the fiscal year ended June 30, 1941, aggregated $2,611,000,000, compared with $1,787,000,000 for the preceding fiscal year, and $2,579,000,000 for the year ended June 30, 1939. Securities proposed for sale by issuers amounted to $2,081,000,000 in the 1941 fiscal year as against $1,433,000,000 in the preceding year and $2,020,000,000 in the 1939 fiscal year. Of the indicated net proceeds from the sale of securities effectively registered during the 1941 period, repayment of indebtedness took 73.6 per cent, new money uses accounted for 14.2 per cent and the purchase of securities took 11.9 per cent.

Eleven stop order proceedings were instituted during the fiscal year. Of these, four of the registration statements were withdrawn and the proceedings dismissed; two resulted in the issuance of stop orders suspending the effectiveness of the registration statements; and five were pending at the end of the fiscal year.

During the year the National Association of Securities Dealers, Inc., which is the only association of over-the-counter brokers and dealers registered under the Securities Exchange Act, was active under the cooperative supervision of the Commission in seeking to raise the standards of business practices in the over-the-counter field through disciplinary proceedings handled by its many local business conduct committees and through educational work.

There were 753 investment advisers effectively registered with the Commission under the Investment Advisers Act at the close of the fiscal year. A survey shows that the number of investment advisers has increased steadily in the last 10 years. Approximately 84 per cent of the total number of firms which were effectively registered with the Commission at June 30, 1941, had commenced their investment advisory activities since 1930. Seventy-seven firms, the largest number to commence such activities in any one year, were organized in 1940.

The Commission actively participated during the past fiscal year in 145 reorganization proceedings under Chapter X of the National Bankruptcy Act. These proceedings involved the reorganization of 177 companies — 143 principal debtor corporations and 34 subsidiary debtors. The proceedings were scattered among federal district courts in 28 states. The aggregate stated assets of the 177 companies totalled approximately $2,214,653,000, while the aggregate indebtedness was about $1,354,374,000. In the exercise of its functions under Chapter X, the Commission has continued in its endeavor to assist the courts in achieving equitable, financially sound, expeditious, and economical readjustments of the affairs of corporations in financial distress. The various regional offices of the Commission are staffed with experienced lawyers, accountants and analysts who are assigned exclusively to the performance of the Commission's duties under Chapter X. This permits the field staffs to keep in close contact with all hearings and issues in the proceedings and with the parties, and makes them readily available to the courts.

Statistical Studies and Report.

A number of important statistical studies were made public during the year. In March the Commission published a report 'Cost of Flotation for Registered Securities 1938-1939,' which presented detailed statistics regarding cost of flotation for issues registered under the Securities Act during the calendar years 1938-1939. The analysis was broken down according to proposed offering, type of securities, major industrial group, size of issue, size of issuer and type of underwriting contract. All data were shown separately for the two cost components — compensation to distributors and expenses.

In May there was published a comprehensive report on the characteristics of issues effectively registered under the Securities Act for the four year period 1937-1940. This report contained for the first time a detailed text analysis of security characteristics, with particular attention being called to provisions for periodic retirement in the case of bonds and preferred stocks and to voting rights in the case of preferred and common stocks.

In June a report was issued entitled 'Sales Record of Unseasoned Registered Securities 1933-1939.' It was based on questionnaire returns from 750 companies covering 849 issues with registered amount of $409,000,000. Major emphasis was placed upon the ratio of the amount actually sold to the amount registered. Detailed breakdowns of this sales ratio were made by type of concern (new venture or going concern), type of security, major industrial group, size of issue and size of issuer.

Among accounting research work performed during the year was the beginning of an extensive survey and study of annual reports to stockholders as compared with annual reports filed by corporations with the Commission under the provisions of the Securities Exchange Act. The objective of the study will be to determine, if possible, the extent to which the Commission's regulations and decisions on accounting matters have influenced reports to stockholders which, with the exception of companies under the Investment Company Act of 1940, are not ordinarily subject to the jurisdiction of the Commission, and whether the financial statements accompanying such reports are in form, content and disclosure reasonably consistent with and comparable to statements filed with the Commission.

The Commission has nine regional offices and a Washington Field Office. The regional offices are located at Fort Worth, New York, Atlanta, San Francisco, Seattle, Chicago, Denver, Cleveland, and Boston.

The Chairman of the Commission is Ganson Purcell, of New York. Other members are: Robert E. Healy, of Vermont; Edward C. Eicher, of Iowa; Sumner T. Pike, of Maine; and Edmund Burke, Jr., of New York. See also articles on BANKS AND BANKING; BUSINESS.