1976 Bank - Police and Certi.pdf

~nnual Repor~1976/LfJ.f\d '/lr;. tlSS'i) fl3,17~:';J pJ42 nd Annual Reportof the SECfor thefiscal yearendedJ une30J1976~SECURITIES AND EXCHANGE COMMISSIONHeadquarters Office500 North CapitolStreetWashington, D C20549COMMISSIONERS*RODERICK MHillS, ChetrmsnPHILIP ALOOMIS, J RJ OHNREVANSIRVINGMPOllACKGEORGE AFITZSIMMONS, SecretaryCornrmssroner A A Sommer resigned from the Commission, sttecnve Apnl2,1976,leaVing one vacancyFor sale by the Supenntendent of Cocuments, U S Govemment Pnntlllg OfficeWashington, D C20402 Pnce $2 25 (paper cover)Stock Number 046-OOO-J ule B Greene, SUite 788, 1375 Peachtree St, N.E., Atlanta, Georgia30309Region4lthnors,Indiana, Iowa, Kansas City (Kansas), Kentucky, MiChi-gan, Minnesota, Mlssoun, Ohro, WisconSin -William D Goldsberry,Room1708, Everett McKinley Dirksen Bldg., 219 S Dearborn St,Chicago, llhnors 60604.Region 5 Oklahoma, Arkansas, Texas,part of Louisrana, Kansas (exceptKansas City) -Richard MHewitt,503 U SCourt House, 10th & LamarSts.,Fort Worth,Texas 76102Region 6NorthDakota, South Dakota, Wyoming, Nebraska, Colorado,NewMeXICO, Utah -Robert H Davenport, Two Park Central, Room640,1515 Arapahoe Street, Denver, Colorado 80202.Region7California, Nevada, Anzona, Hawau, Guam -Gerald E Boltz,Room 1710, 10960 Wilshire Boulevard, Los Angeles, California 90024RegIOn 8 Washington, Oregon, Idaho, Montana, Alaska -J ack HBookey, 3040 Federal BUilding, 915 SecondAve, Seattle, Washington98174Region 9 Pennsylvania, Maryland, Virginia, West Virginia, Delaware,Drstnct ofColumbia-Paul F Leonard, Room300, Ballston CenterTower No3, 4015 WilsonBoulevard, Arlington, Virginia 22203BRANCH OFFICESCleveland, Ohro 44199 -Room 899, Federal OfficeBldg, 1240 E9th atLakeside.Datroit, Michigan48226.-1044 Federal Bldg.Houston, Texas 77002 -Room 5615,Federal Office& Courts Bldg, 515Rusk AveMiami, Flonda 33131 -Suite 701, DuPont Plaza Center, 300BiscayneBoulevard WayVIIPtutadelprua, Pennsylvania 19106.-Federal Bldg.,Room 2204,600 ArchStSt. LOUIS,MIssouri63101.-Room 1452,210 North TwelfthSt.Salt Lake CIty,Utah 84111 -Room 6004, Federal Reserve Bank Bldg ,120 South State StSan FranCISCO,California 94102 -450 Golden Gate Ave.,Box 36042VIIICOMMISSIONERSRODERICK M. HILLS, ChairmanChairman Hills was born on March 9, 1931,In Seattle, Washington. In1952 he receivedhis BA degreefrom Stanford Universityand he receivedhis LL.B. In 1955 also from Stanford In law school he was named to theOrder of the COif. Dunng the period1955--1957, Mr Hills served as lawclerkto Mr J ustice Stanley F.Reed, Supreme Court of theUS., anddunnq1969-1970 he was a vIsitingProfessor at the HarvardLaw SchoolMr Hills was a foundingpartner of the law firm of Munger,Tolles, Hills andRlckershauser, Los Angeles, California Between 1971 and 1975 he wason leavefrom the firm to serve as Chairman of the Boardof RepublicCorporation From April 1, 1975, untilbeingnamed Chairman, Mr Hillsserved as Counselto the President of the United States. Mr Hills was Co-chairman of the Domestic Council Task Force on Regulatory Reform forthe President Mr. Hills was swomIn as Chairman of the Securities andExchange Commission on October 28, 1975, for a term expiringon J une5, 1977.PHILIPA. LOOMIS, JR.Commissioner Loomis was bom InColoradoSprings, Colorado, on J une11, 1915 He received an A B. degree, With highesthonors,from PrincetonUniversity In 1938 and an LL.B. degree, cum laude, from Yale Law SchoolIn 1941, where he was a Law J ournal editor.Prior to J Oiningthe staff of theSecurities andExchange Commission, Commissioner Loomis practicedlaw With the firm ofO'Melveny andMyers In LosAngeles, Cautorrna,exceptfor the period from 1942 to 1944, whenhe servedas an attorneyWith the Office of Price Adrmrustranon, and the penod from 1944 to 1946,when he was ASSOCIateCounsel to Northrop Aircraft, Inc CommissionerLoorrus J Oined the Commission's staffas a consultant In 1954, and thefollOWing year he was appointed ASSOCiate Director and then Director ofthe DIVISion of Trading and Exchanges. In 1963, Commissioner Loomiswas appointed General Counsel to the Commission and served In thatcapacity until rns appomtrnsnt as a member of the Commission. Commis-sioner Loorrus IS a member of the AmericanBar ASSOCIation, the AmericanLaw Institute,the Federal Bar ASSOCiation, the State Bar of Calrtorrua, andthe Los Angeles Bar ASSOCiation He receivedthe Career ServiceAwardof the National CIVil ServiceLeague In 1964, the Secunnes and ExchangeCommission Drsnnquished Service Award In 1966, and the J ustice Tom C.IlClark Award of the Federal Bar Association In 1971 He took office as amember of the Securities and Exchange Cornrrussron August 13,1971,and IS now serving for the term of office expmnq J une 5, 1979JOHNR. EVANSCornrrussroner Evans was born In Bisbee,Arizona, on J une 1, 1932 Hereceivedhis B S degreeIn Economics In 1957,and his M S degree InEconomiCSIn 1959 from the University ofUtah He was a ResearchAssistant and later a ResearchAnalyst at the Bureauof Economics andBusiness Research at the University of Utah, where hewas also anInstructor of Economics dUring 1962 and 1963He came to Washington InFebruary1963, as Economics Assistant to Senator Wallace FBennettofUtah FromJ uly 1964through J une 1971Commissioner Evans wasminority staff directorof the U SSenateCommittee on Banking, Housingand Urban Affairsand served as a member of the professional staff fromJ une 1971 to March 1973 He took office as a member of the Securitiesand Exchange Commission on March 3, 1973, and IS now serving for theterm expiring J une 5, 1978IRVINGM. POLLACKCommissioner Pollack was bornIn Brooklyn, NewYork, on April 8,1918 He received a B A degree, cum laude, from Brooklyn College In1938 and an LL B degree, magna cum laude, from Brooklyn Law SchoolIn 1942Prior to J OIningthe Commission's staff he engagedIn the practiceof law In New York City after serving nearly four years In the United StatesArmy, where he gained the rank of Captain Mr Pollack J Oined the staff ofthe Commission's General Counsel In October 1946 He was promoted, from time to time to progressively more responsible positrons In that officeand In 1956 became an ASSistant General Counsel A career employee,Mr Pollack became Director of theDIVIsion ofEnforcement In August1972 when the SEC's divrsrons were reorganized He had been Director ofthe DIVIsion of Trading and Markets since August 1965, and previouslyserved as ASSOCiateDirector since October 1961In 1967 MrPollack wasawarded the SECDistinguished Service Award for Outstanding CareerService, andIn 1968he was a co-recipient of the Rockefeller PublicServiceAwardIn the field of law,legislation and regulation Mr Pollacktook the oath of office on February13, 1974 as a member of the Secuntresand ExchangeCommission, and IS now serving for the term expiring J une5,1980xTABLE OF CONTENTSOrganizational chart.., , ___ __ _________ IVOomrrussron and pnnopal staff officers VRegional and branch offices VIIBiographies of Commissioners IXPART1IMPORTANT DEVELOPMENTS 3MarketRegulation 3Introduction __ _________ 3Development of the National Market System 4Off-board tradingrules 4Composite limit order book____________________________ 5Composite quotation system 6Consolidated transaction reporting system 7Equalregulation 8Short sale regulation 8Anti-manipulative rules 9Automated routing systems 9Access to exchanges 10Tradingby exchange members________________________ 11Allocation of regulatory responsibihty among self-regula-tory organlzatJ ons__________________________________ 11Enforcement obligations of self-regulatory organizations __ 12FOCUS reportingsystem 12Uniform net capital rule 14Regulation of rnurucipalsecunnes protessronals 14Regulation of the options markets 17Registration and regulation of clearingagencies 18Registration and regulation of transfer agents 19Street name study 20Lost and stolen secunnes 21Fingerprinting of securities professlonals________________ 21Registration and regulation of secunties information proc-essors____________________________________________ 22Commission rates..., ________ 23Use of commission payments by flducianes 24Arab boycott 25Section 31(b) revrew 25IMPORTANT DEVELOPMENTS-ContlnuedDisclosure related matters 26Illegal and questionable corporate payments____________ 26AdvIsory committee on corporate disclosure 27Projections ---- -- - -- - - - - - -- - - 27Beneflclalownershlp 28Communications WIth beneficialowners (Proposed Rule14b- 1) ____________________________________________ 28Tender offers - - - ----- ---- -- - --- - -- - 29Proposals to amend registration forms ---------------- 29Proposals to amend and amendments to certain periodicreports 30Stockholder Proposals --- 31Stock appreciation nghts______________________________ 31Disclosure of environmental matters 31Disclosure of 011 and gas reserves -------------------- 32Accounting matters 32Railroad Act amendments 34Monthly pubhcanon of sigmflcant interpretive letters______ 34Investment compames ----- ---- ---- -- - - -- 34Bank Study 35Vanable hfe Insurance________________________________ 35Status of broker-dealers as Investment advisers -------- 36Colhns vSEC, Murtaugh v S.E.C 36Significant cases involVing secunnes acts ------------------ 36Commission IltlgalIon 42PART 2THE DISCLOSURE SYSTEM 57Pubhc offering. the 1933 Securities Act 57lntormatronprovided 57RevieWIng process 58Time for reglstratlon__________________________________ 58Fmanoal analysis and examination 58Office of 011 and gas__________________________________ 58Real Estate and other tax shelters 59Small Issue exemption 59Regulation A 59Regulation B 60Regulation E 60Regulation F 60Contrnumq disclosure: the Securities Exchange AcL_________ 61Regulallon on exchanges 61Over-the-counter registration 61Exemptions __ __ _ ___ ___ 61Periodic reoorts.,, 61Proxy soacitanona.. 62Takeover bids, large acquisrnons 63insider reporting 63Accounting and auditing standards 64RelatIOns With the accounting protession 64Accounting and auditing standards 65Other oeveloprnenta.. ___________ ___________ 66Exemptions for International banks 68Trust Indenture Act of 1939 70XII_THE DISCLOSURE SYSTEM-ContlnuedInformation for publicinspection; Freedomof Information ActFreedomof Information Act litigation 70PART 3REGULATION OF SECURITIES MARKETS____________________ 77Regulation of exchanges 77Registration __ 77Dehstmq _ _ __ 78Unlisted trading priVileges 78Exchange disciplinary actions 79Exchange rules______ ___ __ 79Exchange Inspecbons____________________________________ 80NYSEspecraust surveillance Inspection 80American Stock Exchange arbitration mspscnon 80BostonStock Exchange inspection ~________ 81NYSEDepartment of Enforcement inspection 81American Stock Exchange options programInspection __ 81Philadelphia StockExchange options programinspection 82ChIcagoBoard Options Exchange Inspectlon____________ 82SuperviSion of the NASD 82NASD rules 83NASD Inspections 85NASD disciplinary actions 86Review of NASD diSCIplinary acnons 86Review of NASD membership actions__________________ 87Supervision of MUnicipal Secunnes Rulemaklng Board 88Revenues. expenses and operations of self-regUlatory orqaru-zabons 88Fmaneral resultsof the NASD 89NASD bUdget 89American Stock Exchange, MIdwestStock Exchange, Na-tional Assocranon of Secunnes Dealers. and New YorkStock Exchange 89Boston Stock Exchange. Chicago Board Options Ex-change. Pacmc Stock Exchange and Philadelphia StockExchange 90Cmcmnan Stock Exchange. Detroit Stock Exchange, Inter-mountain Stock Exchange. and Spokane Stock Ex-change 91Expenses and operations of the MUnicipalSecurities Rule-making Board 91Broker-Dealer Regulation 91RegistratIOn _ _____ 91Recordkeeplng and preservation requirements 92Financial responSibility requirements 92Broker-dealer examinations 92Early warningand surveillance 94Trainingprogram 94Regulatory burdens on brokers and dealers 96Clearance and settlement 96Progress toward anabonal system of clearance andsettlement of sscunnas transactrons, _________________ 96Rule changes of registered c1eanng agencies 97XIIIREGULATION OF SECURITIES MARKET5-ContlnuedExpenses and operations of registered clearingaqencies 98Exemptions ____ 98Securmes Investor ProtectionCorporation 98Proposed legislatIOn toamend the Secuntres InvestorProtectionAct of 1970______________________________ 98Litigationrelated to SIPC 99Proposedamendments to SIPC by-Iaws________________ 99Regulationof SECObroker-dealers 99Short seiling Into underwritten offerings 100Exemplions ________ __ _______ 100PART 4ENFORCEMENT 107Detection 107Cornplamts. 107Market surveillance 107Investigations ____ ____ 108Enforcement proceedings 108Administrative proceedmqs.; ____ __ __ 109Trading suspensions 111Delinquent reports program 112OVII proceedings 113Cnrrunal proceedings 120Organizedcrime program 125Cooperation With other enforcement agencies 126SWISStreaty _______________ ___ ___ ___________ 126Foreign restnctedlist 127PART 5INVESTMENT COMPANIES ANDADVISERS__________________ 133Number of registrants 133Proposedleglslatlon_ __ __ __ _ _ 134Investment Advisers Act Amendments of 1976 134The NASD maximum sales load rule 134Contractual plan reserverequirements lowered______________ 134Proposedrules 135Rule 15a-2 135"Open-seasons" rule 135Temporary Rule 6c-2(T) and proposed Rule 6c-2 135Rule 206(4)--4 136Rule 204-2(J ) 136Rules concerning applications for orders filed under In-vestment Advisers AcL_____________________________ 136Rule 202-1 -_______________________________________ 136Apphcations 137Other developments 138"Moneymarket" funds________________________________ 138Reglstralion of foreign Investment companies 138Secuntres depositorysystem 139"Index" funds -----------___________________________ 139Reallocation of management cornoensanon -___________ 140XIV_____ _ _____ __ ______ __ __ ___- -- ------ ---- - ____________--- - - - --- - _- ______- - - - - _ ___ __ _____ _PART 6PUBLICUTILITY HOLDING COMPANIES 145Composition 145Financing ___ _____ 145Volume 145Proceedings 145Holdingcompany debL__________________________________ 147Financing of fuel and gas supplies 147Amendment of Form U5S and Rule 48(b) under the AcL_____ 147PART 7CORPORATE REORGANIZATIONS 151Proposed bankruptcy legislation 151Summary of acnvmes 152Administrative matters______________________________ 152Trustee's Investigation and statements 153Plans of reorganization 154Activities with regard to allowances 158Intervention In Chapter XI 159PART 8SEC MANAGEMENT OPERATIONS 167Organizational changes 167Information handling 167Office of Consumer Affairs 168Office of Public Information 168Acnvityunder the Freedomof Information Act 169Personnel management 169Recruitment 169Personnel management evaluation 170Trainingand development 170Office space 170Financial management 171PART 9STATISTICS __ __________ ___ _ __ 175The secunties Industry 175Income, expenses, and selectedbalancesheet items 175Table1 Financial Information for broker-dealers 176Historical information-income, expense, and balancesheet mtorrnanon of broker-dealers withsecurities re-lated revenueof $500,000 or more 176Table 2 Historical revenue and expenses for broker-dealers with totalrevenueof $500,000 or more________ 177Table 3Historical consolidated balancesheet for broker-dealers with total revenues of $500,000 or more 178Secuntres Industry dollar______________________________ 178Chart Secunties Industry dollar' 1975__________________ 179Broker-dealers. branch offices, employees______________ 180Chart Broker-dealers and branch offices 180xv_-STATISTIC~ontinuedTable 4. Brokers and dealers registered under the Securi-ties Exchange Act of 1934-effectlve registrations as ofJ une 30,1976 classified by type of orqarnzation and bylocationof principal offlces__________________________ 181Table 5 Applicanons and registrations ofbrokers anddealers-Fiscal year 1976 182Table 6. Consolidated revenues andexpenses ofself-regulatory orqaruzations 183Table 7Histoncal nnanoat Information for self-regulatoryorqarnzanons, _____________ _________ 186Financial msntunona., , ______ __________ ____________ 187Stock transactions of selectedfinancial msntunons 187Table 8Commonstock transacnons and activity rates ofselected financial institutions 187Stock holdings of institutional Investors and others 188Table 9 Market value ofstocknoldmqs ofinstitutionalInvestors and others 188Numberand assets of registered Investment cornparuea., 188Table 10 Compames registered under the InvestmentCompany Act of 1940 as of J une 30,1976 189Table 11 Compames registered under the InvestmentCompanyAct of 1940 189Table 12 New Investment company reglstratlons________ 190Table 13 Investment company registrations terminated __ 190Private norunsuredpension funds assets 190Table 14A Assets of pnvate nomnsured pension fundsbook value,end of year 191Table14B.Assets of pnvate norunsured pension funds.market value,end of year 191Pnvatenorunsured pensionfunds receipts and disburse-ments -_ ___________ _______________ _ _____ 191Table 15 Receipts and disbursements of pnvate norun-sured pension funds -_____________________________ 192Securities on exchanges__________________________________ 192Exchangevolume______ 192Table 16 Exchange volume. 1975 192Chart Market value of secunnss tradedon all U.S stockexchanges________________________________________ 193NASDAQvolume __ 194Table 17 Share volume and dollar volumeby exchanges 194Specialblock cistnbunons 195Table 18 Special block distnbutrons reported byex-changes 195Value and number of secunnes listed on exchanges 196Table 19 Securities listed on exchanges 196Table 20Value of stocks listed on exchanges 197Securities on exchanges______________________________ 198Table 21Secuntres traded on exchanges 198Table 22. Undupllcated count of secuntres on exchanges 1981933 Act registrations 198Effective registration statements filed 198Purpose of registration ___ ____________ _____________ 198Table 23Effectiveregistrations 199Chart Securities effectively registered WIth S E.C 200XVI- ______________________________________STATISTICS-ContinuedTable 24' Effective reqrstratronsby purpose and typeofsecunty: fiscal 1976________________________________ 201Chart: Effective registrations cash sale for account ofIssuers 202Regulation A offenngs________________________________ 203Table 25' Offenngs underRegulabon A 203Enforcement 203Types of proceedings . 203Table 26' Typesof proceedings 204Table27 lnvesnqanons of possible Violations of the Actsadministered by the Commission 206Table 28Administrative proceedings instituted dunng fiS-cal year ending J une 30,1976 206Injunctive actions 1975-1976 206Table 29' Injunctive actions 206Crtrnmal proceedings 206Table 30Cnmmal cases 207List of all foreign corporations on the foreignrestricted list 207Public utility holding companles____________________________ 208Assets______________________________________________ 208Table 31, Public-utility holding company systemL_______ 209Table 32FinanCing of holding company systems________ 210Corporate reorganizations 210Oornrrussron parncipanon ____________________________ 210Table 33. Reorganization proceedings under Chapter X ofthe Bankruptcy Act In which the Cornrrussron parno-pated 211SEC operatlons________________________________________ __ 213Net cost 213Chart:Appropriated funds vs fees collected 214Table 34: BUdget estimates and appropriation 215XVIIPart 1ImportantDevelopmentsMARKETREGULATIONIntroductionShortly before the 1976 fiscal year began,Congress enactedthe most far-reachingamendments to the Federal secunnes lawsSince 1940, the Securities Acts Amendmentsof 1975.1 These amendments substantiallyrevise the regulation of securities exchangesand securities assocranons, and create aregulatory scheme for rnurucipal securitiesprofessionals, transfer agents, clearing agen-cies and securities information processors Inaddition, the Commission ISdirected to facili-tate the establishment of a national marketsystem for securities and a national systemfor the prompt and accurate clearance andsettlementof securities transactions. Thenew provrsrons substantially strengthen theCommission's regulatory and oversight re-sponatnhnes With respect to those marketsand constitute a major tumlng POintIn securi-ties regulation.At the same time, the securities Industry,withthe assistance and oversight of the Com-mission, made SIgnificantstrides toward therealization of a national market system Suchessential components of a central market asconsolidated and nationwide limit order pro-tecnon mechanisms, quotation systems, andtransaction reporting systems steadily con-tinue to evolve. The National AdVISOryBoard,appointed by the Commission pursuantto the1975 Amendments, provided substantialguidance on key policy questions relating tothe establishment of a national market sys-tem.During the fiscal year, the CommissionPart 1ImportantDevelopmentsadopted and Implemented uniform nnanoatresponsibility requirements, applicable for thefirst time to substantially all brokers and deal-ers. And a uniform financial and operationalreporting formwas adopted for all registeredbrokers and dealers, ending duplicative re-porting schemes and dramatically reduonqthe compliance burdens confronting securi-ties professionals especially smaller brokersand dealers.DUringthe last fiscal year, the Commissionbegan to discharge the broad powers con-ferred upon It by the 1975 Amendments.Byworking toward reducing restrictions on theability of exchange members to trade listedsecunnes In the marketplace of their choice,the Commission took a long step towardstrengthening competition In the sscunnesmarkets and removing artifiCialhindrances tothe flow of transaction volume. The Commis-sion's inquiry Into exchange membership andaccess rules began the process of openingthe securmes markets to greater participationby financial mtermedianes In other sectors ofthe national and International economy. TheCommission also began dUringthe last fiscalyear the registration and regulation of securi-ties InformationprocessorsIn addition, the Oomrnissron,In conjunctionWith the newly formed MUniCipal SecuritiesRulemaklng Board, commenceddevelopmentof an integrated pattern of regulation for mu-nicipal securities protessronals. And the Com-mission continued working With the optionsmarkets indeveloping an appropnate schemeof regulationfor this speeahzed marketplace.In response to the directive of the 1975Amendments, the Commission undertook to3register and to regulate transfer agents andclearing agencies The Commission inaugu-rated ItS program for development ofthelegislatively contemplated systemfor theclearance and settlement of securities trans-actions. which program came to Include initialconsideration of the proposed mergerof twomajor clearing entitiesIt may be fairly stated that the Commissionandthe securities Industry together havepassedthrough a year of critical Importanceto the growth and the continued vitality of theNation'ssecuntresmarkets The events of thepast year have donemuch to promote trulycompetitive and efficrent capital markets, ca-pable of serving the Nation's demand for newInvestment capitalwhile operatingIn the pub-lic Interest and for the protectionof InvestorsDevelopment of the NationalMarketSystemAdvisory Committee on the lmpternentetionof a Central Market System -As previouslyreported," the Advisory Committee on theImplementation of a Central MarketSystemIssued a Summary Report of Its final recom-mendations on J uly 15, 1975 3 The Commit-teecompleted Its work onSeptember 12,1975, with the deliveryto the Commission ofa Supplementary Report" outliningthe dellb-eranons leading tothe Committee's moresignificant recommendations, noting unre-solved Issues and setting forththoseviewswhich differed significantly from therecom-mendations of the rnajontyNational Market AdVisory Board -The1975 Amendments directed the Commissionto establisha NationalMarket AdvisoryBoard(the "Board") comprised of fifteenmembers(a majority of whom must be associated withbrokers or dealers) sittingfor terms of fromtwo to five years5 The Board's irutral mem-bership was announced by the CommissionIn August 1975,6andtheBoard has con-ducted monthly pubucmeetings sinceSep-tember 1975The Board IS supposed to givethe Commission ItS views on significant regu-latory proposals made by the Commission oranyself-regulatory organization concerningtheestablishment, operation and regulationof the secunnes markets The Board IS alsoto recommend to the Commission the steps Itfinds appropriate to facilitate theestablish-ment of a nanonal marketsystem and study4thepossible need for mOdifying the Act'sschemeof self-regulation so as to adapt It toa national market system, including the needfor the establishment of a new self-regulatoryorganization (a "National Market RegulatoryBoard") toadminister the national marketsystemThe Board was directedto report theresults of Its study to Congress by December31, 1976, with whatever recommendationsthe Board deems appropriateAs discussed below, the Commissionadopted a rule under the Exchange Act (Rule19c-1) 7 governing off-boardtradingby mem-bers of national securities exchanges At thattime, the Commission requestedthe Board tostudy three specific problems (I)In-houseagency cross transacnons (theCornrnissronrequested the Boardto advisethe Commis-sion of ItS views on thrs Issue no later thanOctober 1, 1976), (II) off-board pnnopal trad-Ing restrictions, and (III) the development of acomposite limit order book. TheBoardwasengaged In these studies as the fiscal yearendedOff-Board Trading RulesSeeton 11A(c)(4)(A) of the Exchange ActSdirects theCommission to review"any andall" rules ofnational securities exchangeswhich limit or condition the ability oftheirmembers to buy or sell secunnes any placebut on such exchanges. Ttus section alsodirects the Commission to report to Congressthe resultsof ItS review, and to commence aproceeding under Section 19(c) of the Act toamendany suchrule Imposing a burden oncornpennonwhich did not appear to the Com-rrussron tobenecessary orappropriate Infurtherance of the purposes of the ActOnSeptember 2, 1975, the Comrrussronreported to Congress the results of ItS review,Includinga descnptlon of the effects on com-petition of eXisting off-board trading restric-tions 9 TheCommission's report found thatcertain exchange off-board trading rules didImpose burdens oncornpetmon which theComrrussron was not thenprepared to con.cludewere necessary or appropriate In fur-therance ofthepurposes of the SecuritiesExchange Act On the samedate,the Com.rrussron Issued a release publishing ItS reportto Congress and announcing the commence-ment of a proceeding, pursuant toSection19(c) of the Act, to determine.a. the extent to which such rules engen-dered significant antrcornpetmve ef-fects;b. whether, If such rules were anncorn-petmve,there were countervailingconsiderations which appropriatelyoutweighed the need to abrogate oramend such rules at that time; andc. whether such rules could be appropri-ately modified so as to further thepurposes of the Securities ExchangeAct 10After eight days of hearings, dunnq whichtestimony from 63individuals representing 19institutions and organizations was received,the Commission adopted Exchange Act Rule19c-1, on December 19,1975 (effectiveMarch 31, 1976), which reflected ItSdetermi-nation that certain aspects of the then exist-Ing off-board trading rules Imposed burdenson competition which could not be J ustifiedInterms of the regulatory objectives of the Ex-change Act 11Rule 19c-1(a) provides that on and afterMarch 31, 1976, the rules of each nationalsecurities exchange may not limit or conditionthe ability of any member to effect agencytransactions on any other exchange or In theover-the-counter market In any equity secu-nty listed or traded on that exchange. When Itadopted the rule, the Commission also an-nounced ItSIntentiona. to consider further whether In-houseagency cross transactions In listedsecunnes should continue to be re-stnoted.Pb to consider (after It received the rec-ommendations of the National MarketAdvisory Board and sawthe progressmade by that date toward establish-ment of a nationalmarket system)fixing a firmdate for the eliminationofrestrictions on off-board pnncrpattransactions;13 andc to sohcit comments on the character-IStiCSof a proposed central limit orderrepository and the specifications ofany plan for the Implementation ofsuch a repository 14Seven national sscurmes exchanges filedrevised off-board trading rules, and the Com-mission found (withone exception) that thoserules were In conformity WIthRule 19c-1 andconsistent with the requirements of the Ex-change Act 15 The Commission commenceda proceeding to determine whether to disap-prove one of the proposed rules, the PublicLimit Order Protection Rule ("PLOPR") filedby the NewYork Stock Exchange ("NYSE")The PLOPR would have limited the ability ofNYSE members to effect agencytransactionson any other exchange without first c1eanngpublic limit orders on the NYSE 16 As poten-tial grounds for disapproval, the Commissionnoted that the PLOPR appeared to be incon-sistent with, among other things, certain sec-tions of the Securities Exchange Act andRule 19c-1Shortly after the close of thefiscal year, the NYSE advised the Commis-sion that It Wishedto Withdrawthe PLOPR,17and, on J uly 28, 1976, the Commission con-sented to the NYSE request and terminatedItS proceeding Withrespect to the PLOPR 18Composite Limit Order BookWhen the Commissionadopted Rule 19c-1governingoff-boardtrading by exchangemembers, It Indicated that It was Initiatingsteps to provide comprehensive limit orderprotection consistent With the public inter-est 19 The Commission expressed ItS beliefthat pubhc limit orders and the methods bywhich they are kept play Important roles Inthe securities markets Under certain circum-stances, displacement of protessional ordersby public limit orders IS appropnate In thepublic Interestand for the protection of inves-tors, to ensure the fairness of the marketsand to provide an opportunity for public or-ders to meet Without the participation of adealer The Commission, however, found thatby their very nature eXistingexchange mech-anisms for the storage of limited pnce ordersare unable to provide full protection for thoseorders, and that regUlatorydevices employedto ensure execution of such orders createcertain adverse effects which outweigh theirlaudable objectives The Commission indi-cated that the solution to these problemsappeared to lie In the utilization of exrsnnqadvanced technology to construct a comput-erized central limit order repository (a "com-posite book") desrqned to provide compre-hensive limit order protection to Investors.The Commission announced ItS intention toconsult With the National Market AdVISOryBoard andto soucupublic comment concern-5Ing the characteristics and specincatrons of acomposite book and the appropriate mannerof achievingItS Implementation 20After ItS stafthad consulted With the Na-tionalMarket Advrsory Board to Identify sub-stantive andprocedural Issues associatedWith the development of a composite book,the Commission solicited public comment onthese Issues,includingthe policy and techni-cal questions associated With ten specifiedcharacteristics of any composite book 21 Ex-tensive written comments have been re-ceived from numerous Individuals, institutionsand self-regulatory organizations DUring thecoming year,the Commission Will formulateand proposean appropriate courseof actionWith respect to the development of a compos-ue bookComposite Quotation SystemSection 11A(c)(1)(B) of theExchange Actdirects the Commission to assure the prompt,reliableand fair collection, processing, distri-bution andpublication ofInformation Withrespectto quotations for and transactions Insecunties and the fairness and usefulness oftheformandcontent of such informationPreviously, the Commission had indicated ItSsupport for a nationwide system making quo-tations fromallmarket makers universallyavailable (a "composite quotations system")In both ItS1972 Market Structure State-menf22and 1973 Polley Statement23As previously reported, 24the CommissionIn 1972 initiatedthe development of a com-posite quotation systembyproposing Ex-changeAct Rule 17a-14 The rule, as Origi-nally proposed,25 would have required allnationalsecurities exchanges to make quota-tionsof their specialists available to vendorsofmarket Information Similarly, theNASDwould have been requiredto make availabletosuch vendors quotations of over-the-counter marketmakers In securities listed ortradedon exchanges Finally, the rule wouldhave required all such quotations to be madeavailableto vendors on a current and contin-uing baSISIn 1974, the Commission reproposed Rule17a-14 In substantially revised form 26 Themajor change was the mclusionof a require-ment that quotations be "reported" by self-regulatory organizations (and certainbroker-dealers) pursuant to a plan(similar to that6required by Exchange Act Rule 17a-15), filedWith and declared effective by the Cornrrus-sion, provrdrnq for theavailability ofsuchquotations to vendors of market Informationon a realtime, current and continuing baSISFollowrnq reconsideration of proposed Rule17a-14, the Commission determined to adoptinitiallya different approach desiqned to en-hance the availability of quotation InformationWithout potentially burdensome Federal regu-lanon On March 11,1975,the Commissionannounced that It had sent letters toallnational secuntres exchanges formally re-questingthem to eliminate, on or beforeMay1, 1975, any of their rules or practices whichrestricted access to or use of such quotationinformation as they then disseminated, or Inthefuture might disseminate, toquotationvendors At the sametime,the Commissionannounced that It was defemng further con-sideranon of proposed Rule 17a-14 until Ithad an opporturuty to observe the effects ofelimination of exchange restrictions on quota-tion dissemination OnMay 7, 1975, theCommission announced that It had receivedresponses to ItS March 11, 1975 request fromall national securities exchanges and that allexchanges either hadtaken the action re-quested by the Commission or had InformedtheCommission that they hadnorules orpractices restricting accessto or use of suchInformation In making ItS announcement, theComrrussion addedthat, In ItS View, the ac-tions takenby the various exchanges wouldtacrhtate the establishment of a central mar-ket system, as contemplated by the Cornrrus-sIOn's 1972 Market Structure Statement andItS 1973 Polley Statement, by making pOSSI-ble the composite display of quotation infor-mation for multiply traded securitiesSince May 1975, several vendors havemade majorefforts to develop and marketacomposite quotation service The Commis-sion has found, however, that despite theseefforts, the quality ofquotation Informationdisseminated to brokers, dealers and Inves-torscan be Improved substantially, and thatnumerous problems relating to the dissemi-nationof useful and reliable quotation Infor-mation have yetto be resolved Exchangemarkets stilido not report"firm" quotations,and no market disseminates Information as toquotation size In many cases, quotation in-formation supplied to vendors IS not updatedpromptly to reflect changes In actual quota-tions In thevarious markets. As thefiscalyear progressed, It became apparent that thelack ofreliable quotations fromthe variousmarkets was hampering private and self-reg-ulatory efforts to establish a viable compositequotation system, theabsence of which Inturn was Impedingdevelopment of a nationalmarket system.OnJ Uly 29, 1976, the Commission pro-posed for public comment ExchangeAct Rule11Ac1-1 27 Rule11Ac1-1 would require, onand alterNovember 1, 1976,national securi-tiesexchanges to collect from theirspecial-IStS,and the NASD to collect fromthirdmarket makers, quotations In eligible securi-ties for disserrunauon by those self-regulatoryorganizations to quotation vendors. In addi-tion,thoseorganizations also wouldbe obli-gated toprovide such vendors With theirspecialists' and market makers' quotationsizes If thosespecialists and marketmakerselect tomake suchsizes available for dis-semination.Although the proposed rule neither speer-nes themanner In which, or the frequencyWith Which the quotations are to be collected,processed, and madeavailable, It wouldre-quire specialists and thirdmarket makers tocommunicate their quotations promptly In ac-cordance With procedures established by therelevant exchanges or assocranon for thetimely drssernmatron toquotation vendorsAnd the proposed Rule would requirequota-tions covered be"firm," subject to certainexceptions In particular, anyspecrahst orthird marketmaker who IS presented With anorder for the purchase or sale of any eligiblesecurity (other thanan odd-lot order) muststandready to execute a transaction In thatsecurity In any amount up to (but In no caseexceeding) his published quotation size (or,In the event noquotation size IS dissemi-nated, a normal Unit of trading) at a price atleast as favorableto the buyer or seller as hrsmostrecently published bid or asked priceThe foregOing requirement would not apply If,alter dissemmanon of hrs published quotationbut before the specralrst or third marketmaker received an order (I) a transaction Inthat security IS effected either on the floor ofthe particular exchange or by the third marketmaker, or IS reported In the consolidatedsystem, or (ii) the speciahst or thirdmarketmaker has communicated a supersedingquotation. However, If he did not communi-caterus superseding quotation Within threeminutes alter a transaction or a report of atransaction, he wouldbe obligated to buy orsell that securityIn accordance With the gen-eral rule as to firmness.Consolidated TransactionReportingSystemIn addition toItS work on developing acomposite quotation system, the Cornrrussronhas assisted In Implementing a consolidatedtransaction reporting system(the "consoli-dated system") As previously reported,28 theconsolidated system developed as a result ofthe Comrmssron's adoption In 1972of Ex-change ActRule 17a-15. Theconsolidatedsystemhas progressed from a pilot statetoan operational reporting system, drsserrunat-Ing last sale reports of transactions executedIn all reportingmarketsfor secunties listed onthe New York Stock Exchange ("Network A")and on the American Stock Exchange, plusselected regional listings ("Network B") Tlusfollowsthe J Oint Industry Plan declared effec-tiveby the Cornmrssron In accordance WithRule17a-15 Moreover, last salereports Inboth Network A and Network B secunnes arenow availableby meansof a high speed datatransrrussron line (the "high speed line"),which for the first time enables Investors andmarket professionals to havesuchinforma-tion available on a real-time baSIS regardlessof any delaysIn the low speed ticker networkdunnq penodsof heavy tradingDUring the period sincethe enactment ofthe 1975Amendments, the Commission'sstaff has met on a regular baSIS With certainsecunnes Information processors, who drs-seminate consolidated last sale reports, andWith the Consolidated TapeASSOCiation (the"CTA"), an assocanon of self-regulatory or-ganizations whichbears the responsibiuty ofoverseeing the J OintIndustry Plan for theoperation of the consolidated system, andwhich IS registered as an exclusive secuntiesrntorrnatronprocessor. Other relevant devel-opments include:a The commencement on April 3D,1976,of Phase II of the J Oint IndustryPlan,makingavailable boththe highspeed lineandlastsale reportsIn both Network A and Network B7securities,which activated certain revisedshort sale provisions of Exchange Act Rule10a-1 and vendor obligations under Rule17a-1529b. The Commission's granting of condi-tional exemptions to certain domestic secun-ties information processors from the displayrequirements of Exchange Act Rule 17a-15,which became applicableupon the com-mencement of Phase II.30The staff of theCommission IS presently studymq the re-quests of certain foreign vendors for condi-tional exemptions fromthese display require-mentsc. The Commission's scsonancn of publiCcomment on whether those provisions of theJ OintIndustryPlanwhich prohibit a securitiesinformationprocessor from retransmittingconsolidated last sale reports on a continu-ous baSISshould be modified or abolished Inlight of the standards now contained In Sec-tions 11A(b)(5), 11A(c)(1)(C) and11A(c)(1)(D) of the ExchangeAct One secu-rities informationprocessor had assertedthatthe reasons for InitiallyImposingsuchprohibi-tions nolonger providea sound baSISfor theirmaintenance.31d. After receiptof several letters fromsecu-rities informationprocessors, as well as fromregistered brokers and dealers, questioningthe level of fees charged by the CTA forconsolidated last sale reports, the Oornrms-sion's staff has undertaken extensive re-search Into the Act's requirements that secu-rities informationprocessors be ableto obtaininformation from an exctusrve processor(such as the CTA) on "fair and reasonable"terms, and on terms that are not "unreasona-bly discriminatorye The comrmssion has analyzed certainproposed rule changes of the National Asso-cratron ofSecurities Dealers, Inc (the"NASD") that would reqUirethe reporting oftransactions to the CTA at the price at whichthe transaction was effected Inclusive of anycornrmssionor cornmtsstonequrvalent (a re-porting mode commonly referred to as "netprinting" of pnnopal transactions) These rulechanges were Originallyfiled by the NASDonJ une 4, 1975, the date the 1975 Amend-ments became law Such changes were pub-lished for public comment and were declaredsummarily effective by the Cornrrussion Inorder to permit the scheduled commence-8ment of Network A of the consolidated sys-tem,32subject to the Oommlssion's preroga-tive under Section 19(b)(2) of the ExchangeAct either to approve the proposed rulechanges or to commence proceedings todetermine whether such rule changes shouldbe disapproved. On December 24, 1975, theOomrmssronpubllshed33 an NASD amend-ment of ItS proposed rule changes whichmodified the proposal to permit the reportingof transactions at the price recorded on thetrade ticket, WithoutrecogniZingany commis-sion or comrnrssion equivalent (commonlyreferred to as "gross printing" of pnncipaltransactions). The proposed modificationseliminated the eXistingdisparity between thereporbngof pnnopat transactions effected byNASDmembers and the reporting of Identicaltransactions effected by members of nationalsecunnes exchanges. On May 12, 1976, theOomrrnseron approved the NASD transactionreporting rules as modlfied.34 While findingthese reporting rules to be consistent with therequirements of the EXchangeAct, the Com-rmssron also noted that ItIntends to continuestudying quesnons related to the reporting oftransactions In eligible secunnes, partrcularfythe method of reporbngpnnopal transactionsconfirmed by a dealer plus or minus a com-rrusston, commission equrvalsnt or differen-tial.EqualRegUlationIn testimony before Congress precedingthe passageof the 1975Amendments, Indus-try representatives urged that the Integrationof eXisting market centers Into a nationalmarket system be accompanied by equalregulationof all market components. The newSection 11A(a) of the Exchange Act directsthe Commissron to assure fair competitionamong brokers and dealers, among ex-change markets, and between exchangemarkets and markets other than exchangemarkets. Since the enactment of the 1975Amendments, the Commissionhas takensteps to assure such equal regulation in twospecmc areas: regUlationof short sales andanti-manipulative rules.Short Sale RegUlationOn J une 12, 1975, theCommissionadopted35 amendments to ItS short sale"rules, Exchange Act Rules 10a-1 and 10a-2,to provide for comprehensive regulation ofshort sales of listed secunnes In all markets(including the over-the-counter market) Inconjuncbonwith the full Implementationof theconsolidated transaction reporting system.36In conjunction With the adoption of thoseamendments, the Commission proposed twofurther amendments to RUle 10a-1 to alle-viate the Impact of the short sale rules on themarket-making ability of regional exchangemernbers.P? After revlewmg the commentsreceved on these further proposals (includingthe views of certain self-regulatory orqaruza-nons presented at a public meeting held onApnl 26, 1976), the Comrmssion determinedto withdraw the proposed amendments. 38The Commission IS connnumq to considerwhether any form of short sale regulation ISnecessary or appropnate In view of the Im-provements In the reporting of transactionsby the consolidated systemand the develop-ment of more sophisticated techniques formarket surveillance by the comrrusson andthe various self-regulatory organlzabons.Anti-Manipulative RUlesBy September 1975, each of the self-regu-latory organizations parnopannq In the pilotphase of the consolidated transaction report-Ing system had adopted a uniform anti-ma-nipulative rule in substantially the form rec-ommended by the Commission'sAdvIsoryCommittee on a Central Market System. InAugust 1975, through idenncal letters to allnabonal securibes exchanges participating inthe consolidated system, the Commission'sstaff requested venficabonthat all of the ann-manipulative rulesrecommended by theCommission in September 1974 had beenadopted.39 All these exchanges replied af-firmatively. On J une 4,1975, the NASDamended and refiled WIth the Commissionproposed anti-manipulative rules relating toover-the-counter trading In eligible seeunnes,which rules were approved by the Commis-sion on May 12, 197640Automated Routing SystemsSection 11A(c)(1)(E) of the Exchange Act,added by the 1975 Amendments, directs theCommissionto assure that all exchangemembers, brokers and dealers transmit anddirect orders for the purchase and sale ofqualified secunties In a manner consistentWIth the establishment and operation of anabonal market system. Two related provi-sions, Sections 11A(a)(1)(C)(I) and (II),re-qutre the Oornrmssionto assure economicallyeffiCientexecutions of securities transactionsand fair competition among brokers and deal-ers, among exchange markets, and betweenexchange and other markets. In furtheranceof thiS obligation, the Commission has re-Viewed proposals (1) by several exchangesrelating to automatic order routing systems(2) by three large broker-dealers WIshingtocommence programs for the In-house execu-bon of certain types of customer odd-lot dif-ferentials, and (3) by two exchanges wishingto prohibt their members from Imposing dif-ferential charges on certain types of odd-lotorders.On November 11, 1975, the PaoneStockExchange, Inc. (the "PSE"), filed a proposedrule change with the Commissionwhichwould expand the capability of the PSE'sautomatic order execution system("COMEX") from 199-share orders to ordersnot exceeding 300 shares." Additionally, thePSE proposed to broaden the prohibition ofthe imposrnonof floor brokerage on COMEXorders which are executed on a formula ba-SIS,to cover all market and limit orders. TheCommissionapproved the PSE's proposal onDecember 23,1975.42On J anuary 9, 1976, the Midwest StockExchange, Inc. (the "MSE"),filed WIth theComrmssrona proposed rule change to con-vert Its automatic execution program (availa-ble for orders from 100 to 199 shares incertain Issues listed on the MSE) ("MAX")from a pilot program to a permanent pro-gram.43MAX orders are executed on a for-mula basis In a manner Similar to that ofCOMEX. The CommissionapprovedtheMSE's proposal on May 14, 197644On February 12,1976, the NewYork StockExchange, Inc (the "NYSE"),submitted aproposed rule change setting forth proce-dures for routing and executing 1Oo-sharemarket orders processed through the NYSE'sDesiqnated Order Turnaround System("DOr').45 DOT orders are executed on thebaSISof the bid/asked pnces quoted on thefloor of the NYSE at the time the orders arereceived on the floor. The Commission ap-9proved the NYSE's DOT proposal on May 19,197646In addition, the Cornrmssron analyzed theregulatory andcompetitive Implications ofprograms by three large broker-dealers toInternalize executions of certarn types of cus-tomerodd-lotordersIn listed sscunues with-out the Imposition of an odd-lot differentialThis question was presented m connectionwith requests by these broker-dealers forexemptions from Exchange Act Rules 10a-1and 10b-6, where applicable, In order tofaCIlitate the operation of theseodd-lot pro-grams 47Finally,the Commission approvedrule pro-posals submitted by the American StockEx-change andthe Midwest Stock Exchangewhichwouldeffectively prohibit members ofthose exchanges (inclUding specialists) act-Ing In thecapacity of odd-lot dealers fromImposinga differential In connection With theexecution of certain types of odd-lot orders48Access to ExchangesGeneral InqUiry-Section 31(b) of the 1975Amendments authonzes the Cornrrussion toreviewthe rules ofanynational secuntiesexchangeor nationalsecurities associanontosee If any of therr rules do not complyWiththe Exchange Act, as amended The sectionprovides that at any time Within one yearofthe effectIvedate of any amendments to theAct, the Commission may give writtennoticeto an exchange or assocranonspecifying theextent to which ItS rules fall to comply With theprovisrons of theSecuntres Exchange Act.AfterSIX months have elapsed followmg re-ceipt of the notice, the Cornrmssron may byorder suspend theregistration of such ex-change or associatron or Impose limitationson the acnvrnes.functions and operations ofthe exchange or assooatron If the Commis-sionnnds, after notice andopponumty forhearing, that the orqaruzationor rules of suchexchange or association do not complyWiththe Exchange Act, as amendedPursuant to Section 31(b). the Commissionannounced on March2,1976,49 that It wasundertakmg a general inqurry ofthe ex-changes, rules relating to membership andassocranonWith members mlight of certain ofthe 1975 Amendments, particularly thosetoSection6 of the Exchange Act Among other10thmqs, Seclion 6(b) now permits anyregis-tered broker or dealer to join a nationalsecunnes exchange and anyperson to be-come associated With a member orqamza-non, subject of courseto statutory dlsquallfl-canons andto appropriate fmancial, opera-tional and competency standards Section6(b) also embodies a prolubmon against ex-change rules Imposmg unnecessary or map-propnate burdens on competition Thepur-pose of the comrrussion's general mquny ISto assure that exchange regulation of accessto membership and associanon WIth memberorganizations IS limited to fulfilling the pur-poses of the Act At the end of the fiscal year,thetennanonal seeunnes exchanges hadresponded With a variety of presentatronsalong With proposed amendments to rules asto whichnotice had been givenpursuant toSection 31(b) m connection With the proceed-ingNew York Stock Exchange Rule Propos-als -On March 11, 1976, theCommissiongave notice of the filing of, and the issuanceof an order instrtutrnq proceedmgs to deter-rrnne whether to disapprove, Rules 309 and310 as proposed by the NYSE 50 ProposedNYSE Rule 309 would prohibit anNYSEmember orqaruzation from havmq as a parenta natural person not a Citizen of, or a com-pany not orgamzed under the laws of,theUmtedStates, unless the NYSE determinedthat brokers and dealers dormcrled rn theUruted States (or thsrr subsrdranes) couldobtain Similar access to secunnes exchangesunder the laws and pohcres of theparent'sdorrucile or principal place ofbusrness orboth Proposed NYSE Rule 310 would pro-Vide that no member orqaruzatton may func-bon as, control, be controlled by, or be undercommon control With a person conductmgcommercral banking operations withmtheUnited StatesUnderSection 19(b) of the Exchange Act,the Cornrrussrongenerally mustapprove, orInstitute a proceedmg to determme whetherto disapprove, a rule change proposed by aselt-requlatory orqaruzanon wrthm35 daysaftera publication of noticeof filing Beforethe Cornrmssion commenced suchproceed-Ings, theNYSE haddeclined theCommis-sion's mvitanon toWithdraw Its proposedrulespendmgthe completion or progress ofthe forthcommg general mqUiry By the end ofthe fiscalyear,the Commission had receivedsubrnrssrons from several Interested personsIn connection with the pending proceedingsTradingby Exchange MembersSection11(a) -As amended by the 1975Amendments, Section11(a)(1) of the Securi-ties Exchange Act prohibits, with certainspecified exceptions (such as marketmakingactivities), any member of a national secun-lies exchange from effecting any transactionon suchexchange for ItS ownaccount, theaccount of an assoaated person, or an ac-count withrespect to which It or any of ItSassociated persons exercises Investment dis-cretion. Under Section11(a), the Commissionhas broad authonty to fashion either moreflexible or morerestrictive standards In lightof changing conditions. Section 11(a)(3) pro-vides that the prohibitions In Section11(a)(1)do not apply beforeMay 1, 1978, to transac-tions effected on an exchange by those whoweremembers of thatexchange on May1,1975On J anuary 27, 1976,51 theCommissionbegan a rulernakmq proceeding to ImplementSection11(a) and requested public commenton a series of relatedquestions In anticipa-tion of May 1, 1978 (and Inasmuch as Sec-tion11(a)(1) Immediately affected memberswho J Oined exchanges after May 1, 1975), theCommission took action to Implement certainspecific exemptions envisroned by the Con-gress. First, the Commission adopted Ex-change Act Temporary Rule 11a-1(T) to Im-plement the exemption In Section11(a)(1)(G)for the proprietary transactions ofcertaintypes of members where the transactionsyield pnonty, parity, and precedence In exe-cution to public orders. At the same time, theCommission proposed Exchange Act Rule11al-2, which would allow members to effecttransactions for the accounts of their associ-atedpersons, and alsotransactions for ac-counts earned by associated persons, onlyon the same basis that such transactionscould be effected for accounts heldby themember Itself The Commission also pro-posed anamendment toItS recordkeepmqrule.Exchange Act Rule 17a-3, which wouldenable every member, broker or dealer todemonstrate ItS compliance with Section11(a)Rectsston ofRule 19b-2 -Exchange ActRule19b-2, adopted by the Commission In1973, required each national sscuntres ex-change to adopt rules specifymq thateverymember of the exchange musthaveas theprincipal purpose ofItS exchange member-ship the conduct of a public secunties bust-ness, In accordance with that rule Rule 19b-2 hadbeenthesubject of extensive litiga-tion 52SinceSection 11(a), as amended bythe 1975 Amendments, was Intendedto dis-place Rule 19b-2, the rule was rescinded bytheCommission 53 Following therescssionof Rule 19b-2, the Commission has approveddeletions by national secunnes exchanges ofrules adopted thereunder and has Indicatedfurther that such rules are no longerconsist-ent with the Act 54Allocation of RegulatoryResponsibility AmongSelf-Regulatory OrganizationsThe1975 Amendments transferred the re-sponstbihty from the Securities Investor Pro-tection Corporation tothe Cornrrussron ofdesignating oneself-regulatory organizationtoInspect members oftwo or more suchorganizations ("dual members") for compli-ance with the applicable tmancralresponsibrl-Ity rules 55Section17(d) of the Exchange Actempowers the Cornrrussron torelieve anyself-regulator of compliance, enforcement, orother regulatory functions with respect to dualmembers, andtoallocate among the self-regulators rulernakmq authority concerningmatters as to which such orqaruzanons sharesuch authority Such action IS topromotecompetition and coordination among the self-regulators and the development of a nationalmarketsystem and a national system for theclearance and settlement of sscuntres trans-actionsOn April 20, 1976, the Comrmssronadopted Exchange ActRule17d-1,56 whichessenlially provides that the Commissionshall designate one of the self-regulators towhich a dual member belongs as responsibleforexamining thedual member forcompli-ance with applicable nnancral responsiburtyrules UnderRule17d-1, writtendesignationof onesuchself-regulatory organization re-lieves allother Interested self-regulators oftrus responsrbihty to theextent specified Inthe designationAt the same time, the Cornrrnssron pro-11posed Rule 17> uc-v>-c!II>C...!"IIC.:.II.....C"-lill....._ IIE- "Eo" "U_..IIIIIL!. . >II."~-W0::U.oV>WU0:::::lsinr-en-179"~~~~~""Broker-Dealers, Branch Offices,EmployeesThe numberof broker-dealers decreased In1975, contmumq a senes of successive de-clines beginning In 1970 Followingthe trendIn the number of broker-dealers, the numberof branchoffices operated by broker-dealersalso continued ItS downward movement, end-Ing the year at 6,267 offices.Thenumber of full-time broker-dealer em-ployees stoodat 242 thousand at the end of1975There were approximately 72 thousandfull-time registered representatives employedIn the Industry at the close of the year, 30percentof Industry total employmentB R 0 K E R - D'EALE RSAN 0 BRA NCH 0 FFie ESo 3000 6000 91) 00197019711972197319741975Broker-Dealers _____ J Branch Of f rc es180p Prel muruirvSOURCE X-17A-l0 REPORTSR Revi s edDS-SOS!_= =Table 4BROKERS ANDDEALERS REGISTERED UNDER THE SECURITIES EXCHANGE ACTOF 1934-EFFECTIVE REGISTRATIONS AS OF JUNE 30,1976 CLASSIFIED BY TYPEOF ORGANIZATION AND BY LOCATION OF PRINCIPAL OFFICES.Number of RegistrantsNumber of Proprietors, Partners, Officers,etc 2.3Location of PrincipalOfficesSole SoleTotal propne-Partner- Corpora-Total propr ..Partner- Corpora-lorshlpsships tlonS4torsmpsships tlOOS4ALABAMA 23 2 1 20 125 3 120ALASKA 0 0 a 0 0 0 0 0ARIZONA 28 4 1 23 105 4 9 92ARKANSAS 22 2 a 20 106 2 a 104CALIFORNIA 480 139 46 295 2595 139 245 2,211COLORAOO 63 7 4 52 408 7 58 343CONNECTICUT 62 8 10 44 465 8 117 340DELAWARE 13 3 1 9 34 3 2 29DISTRICT OF COLUMBIA 31 2 6 23 289 2 31 256FLORIDA 112 10 5 97 481 10 10 461GEORGIA 42 6 1 35 261 6 2 252HAWAII 18 0 a 18 97 0 0 97IDAHO 7 1 0 6 24 1 a 23ILLINOIS 1,363 1,062 91 210 2,650 1,062 451 1,137INDIANA 52 7 2 43 274 7 5 262IOWA 37 2 1 34 225 2 6 217KANSAS 27 2 2 23 282 2 9 271KENTUCKY 11 2 1 8 71 2 3 66LOUISIANA 10 4 0 6 35 4 0 31MAINE 13 1 4 8 53 1 21 31MARYLAND 37 4 4 29 235 4 72 159MASSACHUSETTS 180 54 16 110 1 145 54 110 981MICHIGAN 54 5 5 44 381 5 108 268MINNESOTA 76 4 1 71 626 4 2 620MISSISSIPPI 23 2 5 16 86 2 13 71MISSOURI 67 4 6 57 766 4 144 618MONTANA 3 1 0 2 20 1 0 19NEBRASKA 16 0 0 16112 0 0 112NEVADA 3 1 0 2 8 1 07NEW HAMPSHIRE 3 1 0 211 1 0 10NEW J ERSEY 179 39 26 114 609 39 77 493NEW MEXICO6 1 a 5 30 1 a 29NEW YORK ~XCIUdln9 New York City)280 108 20 152 647 108 59 480NORTH CARL1NA 28 6 1 21 144 6 2 136NORTH DAKOTA 5 0 0 5 27 0 0 27OHIO 98 6 16 76 750 6 221 523OKLAHOMA 22 4 1 17 110 4 2 104OREGON 25 3 1 21 103 3 3 97PENNSYLVANIA 192 26 40 126 1,122 26 213 883RHODE ISLAND 20 5 2 13 48 5 8 35SOUTH CAROLINA12 1 2 9 55 1 9 45SOUTH DAKOTA2 1 0 1 12 1 a 11TENNESSEE49 3 2 44 278 3 29 246TEXAS 152 26 5 121 899 26 23 850UTAH 32 3 4 25 126 3 12 111VERMONT5 2 1 2 22 2 2 18VIRGINIA40 8 3 29 341 8 13 320WASHINGTON55 7 1 47 284 7 4 273WEST VIRGINIA 5 1 04 17 1 0 16WISCONSIN34 3 031 339 3 a 336WYOMING7 2 a 524 2 a 22TOTAL (excludingNew York City)4,124 1,595 338 2191 17956 1595 2,098 14,263NEW YORK CITY1 160 398 249 513 4,923 398 2571 1 954SUBTOTAL5,284 1 993 587 2704 22879 1,993 4,669 16217FOREIGN'24 2 2 20 195 2 9 184GRAND TOTAL5,308 1,995 589 2724 23,074 1,995 4,678 16,4011 R::1/lstrants whose principal offices are located In foreign countries or other junsrncnons not listed2 Inc udes directors, officers, trusteesand all other persons occupyingsimilar status or performing similar functions3 Allocations made on the baSISof location of principaloffices of registrants not actual locations of persons4 Includes all forms of orgamzallons other than sole proprietorships and partnerships181-Table 5APPLICATIONS AND REGISTRATIONS OF BROKERS AND DEALERSFiscal Year 1976BROKER-OEALER APPliCATIONSApplications pending at close of preceding year 39Applications received dunng fiscal 1976 2,601Total applications for disposmon 2,640Drsposmon of ApplicationsAccepted for filing 2,293Returned 224Withdrawn 22Dented 4Total applications disposed of 2,543Applications pending as of J une 30, 1976 97BROKER. DEAlERREGISTRATIONSEffective registrations at close of preceding year 3,546Registrations effective dUring fiscal 1976 2,265Total registrations 5,811RegistratIOns termmated dunng fiscal 1976Withdrawn 442Revoked49Cancelled 12Total registrations terminated 503Total registrations at end of fiscal 1976 5,308INVESTMENT ADVISERAPPLICATIONSApplicatIOns pending at close of preceding year 63Applications received dunng fiscal 1976 1,250---Total appncatons for drsposmon 1,313Disposmon of applicationsAccepted for fi Iing 711Returned 495Withdrawn 3Demed 1Total applications disposed of 1,210Applications pending as of J une 30, 1976 103INVESTMENT ADVISER REGISTRATIONSEffective registrations at close of preceding year 3,420Registrations effective dUring fiscal 1976 694Total registratIOns 4,114RegistratIOns terminated dUring fiscal 1976Withdrawn 238Revoked 9Cancelled 10Total registratIOns terminated 257Total registrations at end of fiscal 1976 3,857182~: : : : ~~~~g~~~f 2g ROl mCCOCOMOCl i , l ) CJ ) ..::r 0>NcoiNMC'S":,q"": .g'"lJ ")r--o..ncovo>....... l.O NN~~~:n~~~ q-- - to....: en;;;;COO>l Ol . nNNMC" l - qMN. . - C")MCO- . : r O' : l Mt ONLJ " l Ol OO>CO coONWOC)(ONVOC"')tO NC"'i~NNN"":M": g'"O'l,..... ...... cn ......,.... ......U") r--~~~~~: ; ~: ; : MCO."": a:i;;;;VC'J M"'I " ' - MI " ' - ~CCCX)cir--:~r--:NV.altO""-~~! : ; ; : n~~~~g~: : : ~CO. . . . . . . cnVr - l . ni , l ) M. . - m . . . . . 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