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INVESTIGATIONs MADE IN 1963
Senator ALLOTT. Now, of the 48 determinations of excessive profits in fiscal 1963—how many actual investigations would these 48 determinations represent?
Mr. HARTwig. Those are 48 cases.
Senator ALLOTT. Yes.
Mr. HARTwig. And some of them might have been consolidations, and some may not have been.
Senator ALLOTT. Maybe my point is not clear. But you say that you had 48 determinations of excessive profits.
Mr. HARTwig. Yes.
Senator ALLOTT. Now, what I was wondering is, how many investigations are reviewed? If you have actually found excessive profits in that many cases how many reviews does that represent?
Mr. HARTwig. Well, let us look at it this way. In 1963 approximately 4,000 filings went through the screening process at headquarters. Out of that 4,000, 551 assignments went to the regional boards. We have two regional boards.
Senator ALLOTT. And where are they?
Mr. HARTwig. One is located here in Washington, and one in Los Angeles. During that same period the regional boards completed 464 assignments; and included in the 464 investigations, if you want to call . that, were 48 determinations of excessive profits.
Senator ALLOTT. Well, gentlemen, that is all I have unless you have something else.
Mr. HARTwig. No, sir.
Senator ALLOTT. I suppose that we will see you a little later—and I hope it is just a little later.
Mr. HARTwig. All right. Thank you, Mr. Chairman.
(Whereupon, at 8:55 a.m., Tuesday, May 5, 1964, the subcommittee adjourned, subject to call of the Chair.)
INDEPENDENT OFFICES APPROPRIATIONS FOR 1965
WEDNESDAY, MAY 6, 1964
Washington, D.C. The subcommittee met, pursuant to recess, at 8:45 a.m. in room S-128, U.S. Capitol Building, Senator Warren G. Magnuson, presiding:
Present: Senators Magnuson, Monroney, Allott, and Young of North Dakota.
SECURITIES AND EXCHANGE COMMISSION
STATEMENT OF WILLIAM L. CARY, CHAIRMAN, SECURITIES AND
EXCHANGE COMMISSION; ACCOMPANIED BY MANUAL F. COHEN, COMMISSIONER; JACK WHITNEY II, COMMISSIONER; PHILIP A. LOOMIS, JR., GENERAL COUNSEL; ALLAN F. CON WILL, DIRECTOR, DIVISION OF CORPORATE REGULATION; RALPH S. SAUL, DIRECTOR, DIVISION OF TRADING AND MARKETS; EDMUND H. WORTHY, DIRECTOR, DIVISION OF CORPORATION FINANCE; WILLIAM E. BECKER, MANAGEMENT ANALYST; AND FRANK J. DONATY, COMPTROLLER
APPROPRIATIONS, FISCAL YEAR 1964, EstIMATE FISCAL YEAR 1965 Senator MAGNUSON. The committee will come to order. This morning we have the Securities and Exchange Commission.
Senator MAGNUSON. Mr. Cary is here, Mr. Cohen and Mr. Whitney and other members of the staff. For the purpose of the record last year your appropriation was $13,937,500. The budget estimates this year are $15,225,000, or a plus of $1,287,500 over last year. Your letter of January 28, 1964, transmitting your budget justifications will be placed in the record at this point,
The chairman has a short statement. We will be glad to hear from you.
Mr. Cary. Fine. If I may identify my colleagues and staff I will like to.
Senator MAGNUSON. We will put in the record, too, the members of the staff that are here. You identify them.
SECURITIES AND EXCHANGE COMMISSION,
Washington, D.C., January 28, 1964. Hon. WARREN G. MAGNUSON, Chairman, Subcommittee on Independent Offices Appropriations, U.S. Senate, Washington, D.C.
DEAR MR. MAGNUSON: Attached is the 1965 budget estimate of the Securities and Exchange Commission in the amount of $15,225,000. It differs from the appropriation of $13,937,500 for this fiscal year in the following respects: Item
Additions Cost of 60 additional positions..
$385, 000 Cost of pay increases in 1965 over 1964.
290, 000 Salary step increases
262, 500 Other expenses.
350, 000 Total...
1, 287, 500 For 1965, the Commission is requesting an increase of 60 additional positions in order to carry out effectively the administration of the Federal securities laws enacted by the Congress for the protection of the investing public. Our aim is to achieve a realistic manpower level, particularly in the inspection and enforcement areas. Of the 60 positions, 47 will be assigned to our regional offices and 13 to our central offices. Distribution of the additional positions by program, in priority sequence, is shown below:
1. Inspection of investment companies. We are requesting funds for an increase of 21 positions for our regional offices to achieve a 2-year inspection cycle (325 inspections) of investment companies in 1965 as compared with an estimated 442-year cycle (150 inspections) in this fiscal year. These companies must be examined thoroughly as they represent a very vital and sensitive area of the securities market. In 1940, when the Investment Company Act was enacted, the aggregate net asset value of all investment companies was $2.5 billion as compared with approximately $35 billion on June 30, 1963.
For all practical purposes, the inspection program was initiated about 2 years ago. It is the very core of our regulatory responsibilities. The program has already proven invaluable, indeed indispensable for the protection of public shareholders.
The inspections frequently disclose situations, which, if not corrected, would result in losses to shareholders and which form the basis for investigative and enforcement action. In fact, for every two inspections made in fiscal 1963, one investigation_relating to serious violations involving possible civil action was instituted. Examples of a few substantial irregularities follow:
1. Unlawful transactions between a fund and its affiliates. In one case where fund moneys were used to finance an enterprise in which directors and officers were interested, restitution of approximately $250,000 was obtained, the fund was liquidated without serious loss to stockholders, and the principals agreed to stay out of investment company activity for a period of 5 years.
2. Larceny of fund assets by its promoter. The larceny escaped detection prior to the inspection by a regional office because of laxness of the directors in performing their duties, negligent performance by the fund custodian and improper certifications by the independent accountant of the fund.
It is the Commission's goal to place the inspection of investment companies on an 18-month cycle. Until that objective is met, the Commission cannot state that it is meeting its full regulatory responsibilities. The Commission has recently approved the need for an annual compliance report from each registered invest
ment company for the purpose of supplementing the inspection program on the proposed 2-year cycle. The compliance reports will enable the Commission to take remedial action, where necessary, on a more current basis. 2. Inspection of investment advisers.-We are requesting an increase of 8 positions for our regional offices so as to achieve a 4-year inspection cycle, which involves the inspection of 440 investment advisers. For the current fiscal year, we expect to achieve a 7-year cycle or 235 inspections. or all practical purposes, the present 7-year cycle is unrealistic. Any inspection program should represent preventive enforcement for the protection of the public investors by a regular and periodic examination of books and records of the registered investment advisers. We have derived an important lesson from our work in the field of investment company inspections, demonstrating the wisdom of providing a realistic examination program. In the case of investment companies, as in the case of investment advisers, we had not inspected most of the firms even once in their history. When we began to step up the investment company inspection program, we found violations of a serious nature leading to court injunctions, recoveries of substantial amounts and acts of gross abuse of trust. This experience has led us to the conviction that an adequate program of inspection in #. field of investment advisers is long overdue. This Commission has been criticized for not uncovering fraudulent activity before it has seriously injured investors. The only way to avoid such situations is to make more inspections so as to identify problem firms, thus minimizing the potential monetary losses to the investing public. The inspections frequently disclose situations, which, if not corrected, would result in losses to customers and which form the basis for investigative and enforcement action. More and frequent inspections are less costly on a long-range basis in “nipping violations in the bud,” thus reducing losses to investors, as compared with the more costly operation of conducting administrative, civil and/or criminal proceedings after the violations have occurred. 3. Investigation and enforcement program.—We are requesting an increase of 20 positions for this program—18 for regional offices and 2 clerical positions for the Division of Trading and Markets. Our full disclosure program is the beginning of our jurisdiction over the distribution of securities; it is not the termination of our responsibilities. We must be in a position to determine whether the registration or antifraud provisions of the acts are being violated not only during a public offering, but in the subsequent trading of a security. The additional positions are necessary in order to accelerate the disposition of investigations as well as administrative, civil and criminal proceedings pending before the Commission and courts. Our backlog of investigations has reached an unrealistic figure (1,095) on December 31, 1963 and must be reduced. Current investigations and enforcement actions are far more complex and difficult than those which the Commission faced in the past. It is our experience that our cases become more and more intricate as violators are forced to exercise greater ingenuity in order to avoid the impact of our investigations and enforcement actions. Thus, more manpower must be utilized to uncover violations. To illustrate the increased complexity of enforcement actions, the number of defendants in broker-dealer proceedings has more than doubled in the past 5 years. During the past 4 fiscal years (1960–63), 208 cases were referred to the Department of Justice as compared with the same number for the previous 10 years (1950–59). It is estimated that 55 criminal reference reports will be referred to that Department in both 1964 and 1965. Moreover, the number of charges, and of defendants and coconspirators in the past year has increased significantly. Such criminal work is far more demanding in both extent and depth than is required in most civil and administrative proceedings. 4. Regulation of earchanges and over-the-counter market, and economic and statistical research.-For 1965, seven additional positions are requested for this program, distributed as follows: five for the Division of Trading and Markets and two for the Office of Program Planning. The report of the special study of securities markets recommended that the Division of Trading and Markets be strengthened and “so organized and staffed that it will be in a position to maintain more effective liaison with all of the selfregulatory agencies, examine their rules and rule changes, keep informed as to their enforcement activities, and generally oversee and evaluate their performance on a continuous basis and advise the Commission with respect thereto.” The study recommended also that the Commission be more adequately staffed to enable it to give greater emphasis to the “compilation, analyses and, where appropriate, publication of data concerning important aspects and developments of the trading markets.” Accordingly, the seven positions requested are required to provide more effective supervision over self-regulatory organizations and analyze economic and statisticsl data about the securities markets.
I have indicated generally the programs for which we are requesting 47 additional positions in 1965 for the regional offices, 7 for the Division of Trading and Markets, and 2 for the Office of Program Planning. The remaining four positions are for the increased number of administrative hearings and additional workload pertaining to administrative services resulting from the Commission's accelerated enforcement and inspection programs.
It should be noted that approximately $2.9 million in statutory fees and other revenue will be collected by the Commission in this fiscal year as compared with an estimate of $3.1 million in fiscal 1965. These funds are not available for expenditure but are deposited in the general fund of the Treasury.
he amount requested in this estimate for 1965, in the unanimous opinion of the Commission, is required to enable it to conduct its operations in an efficient i. adequate manner and in accordance with the expressed intent of the securities aws. Sincerely yours, WILLIAM L. CARY, Chairman.
INTroduction or WITNESSES
Mr. CARY. Commissioner Jack Whitney is right behind me at this end. At the very far end is my colleague, Commissioner Manual Cohen. We have here Ralph so who is the Director of our Division of Trading and Markets, and Philip Loomis, our General Counsel is right behind me. William Becker, our management analyst is farther behind me, and Frank Donaty, who has been here very frequently.
Senator MAGNUson. He is the important man we want to talk to.
Mr. CARY. He is the man who runs this show. Allan Conwill, Director of our Division of Corporate Regulation, who handles investment companies, corporate reorganizations and the like; and Ed Worthy who is the Director of our Division of Corporation Finance, largely the matter of registration statements, proxy statements, and the application of disclosure generally.
ADDITIONAL AMoUNT AND Positions REQUESTED
Mr. Chairman, as you already indicated, the total amount of our request for next year is $15,225,000—an increase of $1,287,500 over our appropriation of $13,937,500 for this fiscal year. The increase of $1,287,500 represents the following items: 1. $385,000 for 60 additional positions; 2. $290,000 for pay increases; 3. $262,500 for within-grade increases; and 4. $350,000 for other expenses. Briefly, we are requesting funds for 60 additional positions, 47 will be assigned to our of offices. I wish to point out that about 45 percent of our requested increase of $1.3 million represents mandatory pay increases. In addition to covering the additional positions, I §s". cover our existing space deficiency and our need for a computer, which are factors going into that item of $350,000.
1. INSPECTION of INvestment CoMPANIEs
I will now discuss our request of 60 additional positions. Of this total, we are requesting funds for 21 positions for our regional offices to achieve a 2-year inspection cycle of investment companies, which involves the inspection of 325 companies in 1965, as compared with an estimated 4%-year cycle or 150 inspections in this fiscal year.