1942: Securities And Exchange Commission

Administration of the Public Utility Holding Company Act.

The major activities of the Securities and Exchange Commission during 1942 had to do with the administration of the Public Utility Holding Company Act of 1935. Substantial progress was made towards reaching the objectives sought by the geographic integration and corporate simplification provisions of the Act. There were twenty-six new proceedings begun during the Commission's fiscal year, which ended June 30, 1942, to require registered public utility holding companies to comply with such provisions of the statute. The holding company systems involved in such proceedings at June 30, had consolidated assets aggregating nearly $14,300,000,000. The total consolidated assets of all the public utility holding companies registered with the Commission amounted to $16,000,000,000.

While most of the above proceedings are still pending, much progress has been made in the determination of many of the issues involved. In a number of cases, the Commission has entered orders prescribing the action which must be taken to comply with the statute. As to several others, the proceedings have reached the stage where such orders may be expected in the near future. Moreover, in the course of the proceedings leading to these specific orders, the Commission has had occasion to pass upon most of the disputed questions of interpretation of the Act. As a result of these discussions the managements of most of the holding company systems are substantially advised as to the scope of the action which must be taken to bring about compliance with the geographic integration and corporate simplification sections of the Holding Company Act.

In addition to providing for the simplification of the corporate structures of public utility holding companies and the confinement of their business to economically integrated units, the Public Utility Holding Company Act of 1935 is designed to eliminate abuses and to 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, the supervision of security transactions of holding companies and their subsidiaries, the supervision of acquisitions of securities and utility assets by holding companies and their subsidiaries, and the supervision of payment of dividends, solicitations of proxies, inter-company loans, and service, sales and construction contracts. The Commission has no power to regulate the rates of public utilities.

During the fiscal year ended June 30, 1942, 124 applications or declarations pertaining to security issuances filed by registered public utility holding companies and their subsidiaries were approved by the Commission. These effective filings aggregated $631,661,484 in principal amount compared with $1,065,893,281 for the preceding year. The total of new securities issued during the period from Dec. 1, 1935, the effective date of the Act, to June 30, 1942, amounted to $4,583,487,267.

Administration of Other Laws.

The other laws administered by the Commission include the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. In addition, the Commission has certain duties to perform under Chapter X of the National Bankruptcy Act. None of the statutes administered by the Commission guarantees investors against loss. Certain powers are given the Commission with regard to 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, generally speaking, 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 to 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 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 in that field.

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.

Investigation of Complaints and Criminal Proceedings.

During the Commission's fiscal year ended June 30, 1942, it received approximately 11,638 items of mail classified as 'complaint-enforcement.' The major part of this mail consisted of letters from the general public seeking information, complaining of fraudulent or other illegal practices and seeking various types of aid. The remainder of these items related to correspondence between the Commission and its regional offices or state or other Federal enforcement agencies on matters involving the investigation of securities transactions and irregularities. Much of the Commission's investigative and enforcement work is conducted through its ten regional offices.

The Commission carefully considers and replies to every inquiry sent in by the public and investigates every complaint over which it has jurisdiction. Although it cannot give general financial or legal advice, it has adhered to its policy of furnishing such information as it can, including any available public data which may not be readily accessible to the average members of the public. At the beginning of the past fiscal year there were pending 632 investigations and legal cases, and during the year 470 additional investigations were initiated. Out of this total of 1,102 cases, 442 were disposed of, leaving 660 cases pending at June 30, 1942.

At the beginning of the fiscal year which ended June 30, 1942, 10 civil proceedings instituted by the Commission were pending. During the year the Commission instituted 36 additional proceedings including 33 injunctive actions brought against 91 persons to restrain them from fraudulent and otherwise illegal practices in the sale of securities. Of this total of 46 proceedings, 35 were disposed of during the year including 28 cases which resulted in the entry of injunctions against 61 persons. In addition, 21 persons were enjoined in 8 cases, which cases are still pending as to other defendants. Eleven civil proceedings were pending at the end of the fiscal year. Since its inception the Commission has instituted a total of 440 proceedings and disposed of 429. Injunctions have been obtained against 939 firms and individuals.

As to criminal proceedings, the Commission up to July 1, 1942, had referred to the Department of Justice 378 cases, including 49 cases which were referred during the past fiscal year. Since the organization of the Commission in 1934, a total of 2,035 defendants have been indicted in 306 cases, including 27 cases which had been referred to the Post Office Department. During the past year, indictments were returned against 183 defendants.

Since the inception of the Commission, convictions have been obtained against 885 defendants in 216 cases, representing 91.3 per cent of the 259 cases which have been disposed of as to principal defendants; 142 defendants named in 44 cases were convicted during the past year.

Registration of Securities.

Securities effectively registered under the Securities Act during the fiscal year ended June 30, 1942, aggregated $2,052,000,000 compared with $2,611,000,000 for the preceding fiscal year, and with $1,787,000,000 for the fiscal year ended June 30, 1940. Securities proposed for sale by issuers totalled $1,461,000,000 compared with $2,081,000,000 in the preceding fiscal year and with $1,433,000,000 in the 1940 fiscal year. Of the indicated net proceeds from the sale of securities effectively registered during the 1942 period, repayment of indebtedness took 52.6 per cent, new money uses accounted for 41.1 per cent, and the purchase of securities absorbed 5.8 per cent. Of the remaining, 0.3 per cent went for the purchase of other assets, while 0.2 per cent was either for miscellaneous uses or was unaccounted for. Seven stop orders were issued during the year suspending the effectiveness of registration statements.

Up to and including June 30, 1942, 2,953 issuers had filed a total of 5,555 applications for registration of securities on national securities exchanges in accordance with the provisions of the Securities Exchange Act. As of June 30, 1942, the registration of securities of 2,299 of these issuers was in effect, and the registration of the securities of the remaining 654 issuers had ceased to be effective.

The National Association of Securities Dealers, Inc., remained as the only national securities association registered with the Commission under the provisions of the Securities Exchange Act. Membership in the Association decreased from 2,974 members as of July 1, 1941, to 2,593 members as of June 30, 1942. This loss of 181 members or 6.1 per cent of the enrollment at the start of the year, compares with the decrease of 508, or 8.4 per cent of the 6,065 broker-dealers registered with the Commission at the beginning of the year. During the year the Association developed into accomplishment the program initiated in May 1941 of effective nation-wide surveillance and regulation of its members in line with the purpose of the over-the-counter-broker-dealer section of the Securities Exchange Act. This program involved examinations of members and the filing of complaints against members found to be in violation of the rules of the Association. These examinations were conducted by each of the fourteen District Business Conduct Committees under the general supervision of the main office of the Association.

There were 732 investment advisers effectively registered with the Commission under the Investment Advisers Act at June 30, 1942. This compares with 753 investment advisers effectively registered at the close of the previous fiscal year.

The Commission's main offices are now located in Philadelphia, Pennsylvania. It has ten regional offices and an office in Washington, D. C. The regional offices are located at Atlanta, Baltimore, Boston, Chicago, Cleveland, Denver, Fort Worth, New York, San Francisco, and Seattle.

The Chairman of the Commission is Ganson Purcell, of New York. Other members are: Robert E. Healy of Vermont; Sumner T. Pike of Maine; Edmund Burke, Jr., of New York; and Robert H. O'Brien of Montana.