Appendix — Steadman v. Securities & Exchange Commission

IN THEE

-_- err Yaa noe Ce oe ene eel end

SUF 2=} CCURT OF THE UNITED SiAIES

OCTOBER TERM, 1979

CHARLES W. STEADMAN,

Petitisner,

5

~_r a > - . 7. Pied bord all ted é 4

SECURITIES AND EXCHANGE COMMISSION,

Resooncent.

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On Pet:ition for a Wrat ec: Cérticlari to the

- i . — oe > h- £ > ~ .

wnited Stares Court of Appeals

fet the Eignta c.rcuit

PETITIONER'S SUFPLEMENTAL APFENL IY

PETER J. NiOALLS

ALEX KRCCINSA’

GREGS LEVY

Covington & Euslings

268 Sixteenth S“<reet, N.

Washington. D.C. zG6uCe

Attorneys for Petitiouer

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934

Rel. No. 13695 / June 29, 1977

INVESTMENT COMPANY ACT OF 1940

Rel. No. 9830 / June 29, 1977

INVESTMENT ADVISERS ACT OF 1940

Rel. No. 593 / June 29, 1977

Admin. Proc. File No. 3=-3101

In the Matter of

STEADMAN SECURITY CORPORATION

1730 K Street, N.W.

Washington, D.C.

(801-8141)

CHARLES W. STEADMAN

REPUBLIC SECURITIES CORPORATION

(8-13223)

STEADMAN INVESTMENT SERVICES CORPORATION:

(8-14704 and 801-5679) :

THE STEADMAN CORPORATION OF AMERICA

(8-13995)

ABERDEEN MANAGEMENT CORPORATION

(8-1867 )

» * @

OPINION OF THE COMMISSION

BROKER-DEALER AND INVESTMENT ADVISER

PROCEEDINGS

‘

Grounds for Remedial Action

Fraud

Late Filings

Receipt of Illicit Compensation

from Registered Investment Com-

panies by their Investment Adviser

Where an investment company complex's

controlling person concealed material facts

from investors, caused the entities that he

controlled to breach their reporting obliga-

tions to the Commission, and also caused a

registered investment adviser, all of whose

voting stock he owned, to accept compensation

from two of its advisee-investment companies

that was not described in the advisory

contracts, held, in public interest to bar

that person from association with any

investment adviser, to prohibit him perma-

nently from serving or acting in any of the

capacities enumerated in Section 9(b) of

the Investment Company Act, and to suspend

‘

» 3 «

him from association with any broker or

dealer for 12 months. But order's effective

date stayed for 90 days to facilitate an

orderly transition in the management of the

affected investment companies and to give

the barred individual an opportunity to

dispose of his controlling interest in the

advisory organization.

Fraudulent Omissions to Disclose

Material Facts

Bank Loans

Bank Deposits

Checking Accounts

Certificates of Deposit

Causal Relationships -- Signifi-

cance of

Management -- Character of

Materiality

Willfulness

ee ee ee ee ee ee ee ee ee ee

—

State of Mind

Intent to Defraud

Scienter

Applicability of Ernst & Ernst v.

Hochfelder, 425 U.S. 185 (1976),

to Administrative Proceedings

Applicability of Ernst & Ernst v.

Hochfelder, supra, to cases

arising under the Investment

Company and Investment Advisers

Acts

Investment company manager's concealment of

his heavy borrowings from the very same

banks in which he caused the investment

companies to deposit large sums in non-

interest bearing accounts, held, fraudulent

and hence in willful violation of Section

17(a) of the Securities Act, Section 10(b)

of the Securities Exchange Act, Rule 10b-5

under the latter section, Sections 206(1)

and 206(2) of the Investment Advisers Act,

Section 20(a) of the Investment Company Act

and the Commission's rules thereunder, and

also Sections 30 and 34(b) of the Investment

ee a

Company Act as well as the Commission's rules

under the last two sections.

Investment company manager's heavy borrowings

from the banks in which he caused his invest-

ment company clients to keep their cash, held,

material to investors even in the absence of

a causal link between the loans to the manager

and the investment companies' deposits because

"reasonable investors could reasonably have

deemed the relationships corrupting."

A failure to disclose material facts by one

charged with the duty to do so is willful

even in the absence of intent to defraud.

Proof of intent to defraud, held, unnecessary

in administrative proceedings under the

Securities Exchange, Investment Company, and

Investment Advisers Act. Scienter requirements

of Ernst & Ernst v. Hochfelder, 425 U.S. 185

(1976), held, inapplicable to administrative

proceedings initiated by the Commission.

Though relevant to administrative proceedings

initiated by the Commission, scienter has no

bearing on the willful violation issues in

them. It goes only to the sanction question.

—_ a

s

iy ae

Advisory Contracts -- Advisory Compensea~-* on

Investment Company Managers --

Compensation

Interest-Bearing Loans and Exten-

Sions of Credit

Advisory Fees -- Overpayments of

Refunds -- Failure to Make when

Due

Money -- Use of as Compensation

Brokerage -- As Compensation

Sections 15(a)(1) and 17(e)(1) of

the Investment Company Act Con-

strued

Advisory Contracts -- Requirements

that all Compensation to be Paid

Thereunder be Described

Where an investment company manager borrowed

substantial sums, on which he paid interest,

from the banks in which the investment

companies kept their cash, held, such loans

—— k

———

=_—

r,s eS le le Ole ee le

a

were "compensation" to the manager. But they

were not "compensation" for purposes of Section

15(a)(1) of the Investment Company Act. The

only compensation that counts for purposes of

Section 15(a)(1) is compensation paid by the

investment company itself. On the other hand,

such compensation does fall within the prohibi-

tions of Section 17(e)(1) because that section

reaches any compensation from any source.

Portfolio brokerage business at customary rates

of commission obtained by investment adviser

from the commercial banks in which his invest-

ment companies kept substantial sums on deposit,

held, compensation to the adviser.

Loans and portfolio brokerage business obtained

by an investment adviser to investment companies

from the banks in which those companies kept

substantial deposits, held, compensation to the

adviser -- but not prohibited by Section

17(e)(1) of the Investment Company Act because

neither purchases nor sales of the investment

companies' property were involved. Checking

accounts involve the rendition of services by

the bank. No "property" interests are bought

or sold.

= oe

A certificate of deposit issued by a commercial

bank is "property" for purposes of Section

17(e)(1) of the Investment Company Act. But

adverse findings, based on the purchase of such

a certificate by a registered investment company

whose investment adviser borrowed from the

issuing bank, withheld, where causal connection

between the investment company's purchase of

the certificate and the issuing bank's loan to

the investment adviser unclear.

Where registered investment companies overpaid

their advisory fees, where the adviser did not

refund such excess in toto as soon as the

requisite computations were made but did so in

monthly installments with interest at a rate

appreciably below the then prevailing prime

rate, and where such arrangements were not

described in the advisory contracts, held,

arrangements were in willful violation of

Section 15(a)(1) of the Investment Company Act.

An investment adviser who uses money that

belongs to his investment company client

receives "compensation" from that client.

A bargain rate of interest is "compensation"

moving from the recipient of such interest to

the party paying it.

i ‘ s

;

, « '

.

o? «

Joint or Joint and Several Participants

Combinations

Section 17(d) of the Investment

Company Act Construed

Absent a finding of a causal nexus between the

loans to the adviser and the deposits by the

investment companies, a showing that an invest-

ment adviser borrowed money from the banks in

which his investment company clients kept large

sums on deposit, held, insufficient to establish

a joint participation between the adviser, on

the one hand, and the investment companies, on

the other, for purposes of Section 17(d) of the

Investment Company Act and Rule 17d-1 thereunder.

Section 17(d) of the Investment Company Act

does not reach every economic relationship in

which a registered investment company is on one

Side and one of its affiliates on the other.

Some element of combination must be shown in

order to bring Section 17(d) of the Investment

Company Act to bear on a particular situation.

If there is such a combination, the section

applies even though the investment company is

not a conscious participant.

— "=

Tender Solicitation Fees

Section 17(e)(1) of the Investment

Company Act Construed :

First Multifund of America, Inc.,

44 S.E.C. 680 (1971), Distinguished

Where investment adviser to registered investment

companies retained tender solicitation fees

received from tender offerors who wanted to

purchase and did purchase securities owned by

the investment companies and did so without

performing any necessary brokerage services,

heid, willful violation of Section 17(e)(1) of

the Investment Company Act, which prohibits

persons affiliated with registered investment

companies from accepting any compensation (other

than a regular salary or wages from the company)

for the purchase or sale of any property to or

for the company, except in the course of such

person's business as an underwriter or broker.

Where an investment company needs no brokerage

service, its affiliated person is precluded

from collecting any brokerage fee.

One who receives an advisory fee from an

investment company in return for his services

= 2% &

in formulating the company's investment

decisions cannot pocket a second fee for

the very same service by posing as a broker.

In First Multifund of America, Inc., 44

S.E.C. 680 (1971), the investment company

needed brokerage services in order to

achieve its objective. Hence the affiliated

broker was held entitled to compensation.

In the tender offer situation on the other

hand, the investment company needs no broker.

Late Filings

Public Interest Implications

Egregiously late filings of an investment

company complex's required reports have

grave public interest implications.

Investment Company Complexes -- Inter-

company Transactions

Foreign Unregistered Investment

Companies-Transactions with

Affiliated Domestic Registered

Investment Companies

Section 17(a) of the Investment

Company Act Construed

~— - a

Where a foreign unregistered investment

company bought securities from and sold

them to domestic registered companies that

were under common control with it, held,

transactions were in willful violation of

Section 17(a) of the Investment Company Act.

Section 17(a) of the Investment Company Act

prohibits members of an investment company

complex from swapping securities with each other.

Where transactions in securities among members

of an investment company complex were in willful

violation of Section 17(a) of the Investment

Company Act and where no exemption was available

under the Commission's Rule 17a-7, because one

of the companies involved was not registered

under the Act, held, exemptive order should

have been applied for and failure to seek it

cannot be condoned. Nevertheless, such viola-

tions are of little weight in assessing sanc-

tions because of their somewhat technical

character, because there was no showing that

violative conduct inflicted any harm and

because they saved investors substantial

brokerage commissionis.

—: a

Control

Investment Companies -- Sole

Investment Discretion

Investment Advisers to Investment

Companies -- Nature of the Relation-

ship

Independent Contractors

Stock Ownership

Section 2(a)(9) of the Investment

Company Act Construed

Where an investment adviser to an unregistered

foreign investment company had sole investment

discretion with respect to its portfolio, held,

the adviser controlled the company for purposes

of Section 2(a)(9) of the Investment Company Act.

Control of an investment company's portfolio is

control of the company itself.

An investment company's investment adviser is

almost always in control of his investment com-

pany client. That is so even where he owns none

of the investment company's stock and even where

a?

ultimate control is in the hands of others.

The adviser's controlling influence over his

aCvisee does not stem from stock ownership.

It stems from the fact that he manages the

advisee's affairs and is normally the only

audible voice in its management.

An investment adviser is an independent con-

tractor. Hence his position with the advisee

is not an "official position" for purposes of

Section 2(a)(9) of the Investment Company Act.

Evidence

Standard of Proof

A preponderance of the evidence is sufficient

to establish the truth of an allegation in an

administrative proceeding under the federal

securities statutes.

Public Interest

Dominant Individuals and their

Corporate Instrumentalities

Corporate Respondents with Innocent

Non-voting Shareholders

4

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Sanctions -- Withholding of

Jurisdiction -=- Reservation of

Where an investment advisory organization's

misconduct was extremely serious, held, organi-

zation's controlling person and sole voting

shareholder barred from association with any

investment adviser, permanently prohibited from

any association with any registered investment

company in any of the capacities enumerated in

Section 9(b) of the Investment Company Act, and

suspended for 12 months from association with

any broker or dealer. But sanctions on the

corporate respondents controlled by that person,

withheld, in the Commission's discretion because

of the lack of any pressing need for such sanc-

tions, because corporate respondents had

innocent non-voting shareholders, because

putting the corporate respondents out of

business at once would leave the controlling

person with nothing to sell which would be

inconsistent with the Commission's decision to

give the individual wrongdoer an opportunity to

dispose of his interest, and because Commission

wished to give corporate respondents an adequate

opportunity to liberate themselves from the

wrongdoer's controlling influence.

eo if «=

But jurisdiction reserved to impose appropriate

sanctions on corporate respondents, should they

fail to make required showing of liberation

within the 90 days allotted for that purpose.

Breach of Fiduciary Duty Involving

Personal Misconduct -- Cognizabilitv

of in Administrative Proceedings

Section 36(a) of the Investment

Company Act Construed

Section 36(a) of the Investment Company Act is

a grant of jurisdiction to the federal courts.

Hence that section cannot serve as the sole

basis for an administrative proceeding. But

that section is pertinent to the assessment of

sanctions in administrative proceedings other-

wise properly before the Commission.

Where the record in an administrative proceed-

ing with respect to an investment company

manager showed that he had willfully violated

significant substantive provisions of the

securities statutes and also showed that those

willful violations entailed breaches of "fidu-

Ciliary duty involving personal misconduct,"

held, the breach of duty element is germane in

fixing the quantum of remedial action.

- 17 -

Bar Orders

Disqualifications

Orders of Permanent Prohibition under Sec-

tion 9(b) of the Investment Company Act

Stays

Bar orders normally become effective on

issuance. But when appeals to the Court of

Appeals are taken or about to be taken, the

Commission gives stays of sufficient duration

to permit applications for further stays to

the Court of Appeals.

Where a bar order issued against the operating

head of an investment company management organi-

zation, held, effectiveness of bar stayed for

90 days to give investment companies' directors

adequate opportunity to make appropriate arrange-

ments for the companies' future and to give the

barred individual an opportunity to dispose of

his controlling interest in the advisory

organization.

The Commission always retains control over its

own orders. Inherent in the power to impose

~— i)

disqualifications is the power to lift or

modify those disqualifications.

Constitutional Law

Ex-POst-Facto Laws

Statutory Construction

Changes in Remedies -- Retrospective

Application of Continuing Wrongs

Section 9(b) of the Investment Company

Act Construed

Section 203(f) of the Investment Advisers

Act Construed

Remedies added to the Investment Company and

Investment Advisers Act by amendments to those

statutes that become effective on December 14,

1970, held, available in a case involving

misconduct some of which occurred before that

date because the statutory changes in question

went solely to matters of remedy and had no

bearing on legal rights or legal duties and

because much of the misconduct occurred after

the amendments had become law.

= 19 «

Constitution's ban on éx=-post-facto laws, held,

inapplicable to the retrospective application

of tests of fitness in licensing statutes.

APPEARANCES :

Peter J. Nickles, of Covington & Burling, for

respondents.

Vernon J. Vander Weide and Michael A. Starr, of

the Washington Regional Office, for the Division

of Enforcement of the Commission.

James C. Meers, of Corcoran, Youngman & Rowe,

for certain investment company directors.

David Silver and Matthew P. Fink, for the

Investment Company Institute.

I. INTRODUCTION

Charles W. Steadman, an investment company

manager, and five corporations that he heads 1/

appeal from an administrative law

1/ All five are registered with us. Some are

registered as investment advisers. Others

are registered as brokers and dealers.

- 20 =

judge's initial decision adverse to them. 2/

The principal corporate respondent is Steadman

Security Corporation ("SSC"). Steadman owns

all of SSC's voting stock. And SSC owns all of

the stock of the other corporate respondents.

Through SSC and SSC's subsidiaries, Steadman

manages a group of mutual funds. During the

relevant period, that group consisted of:

Steadman American Industry Fund,

Inc.

Steadman Science and Growth

Fund, Inc.

2/ Our Division of Enforcement is satisfied

in the main with the initial decision.

However, it too appeals. Its appeal

brings up for review the correctness of

the administrative law judge's refusal to

make some of the findings of violation for

which the Division asks. Leave to be

heard was granted to certain directors of

the Steadman-managed investment companies.

Such leave was also granted to the Invest-

ment Company Institute. Briefs were

filed, and oral argument heard. Our

findings are based on an independent

review of the record.

w» 22 «

Steadman Fiduciary Investment

Fund, Inc.

Consumers Investment Fund, Inc.

Associated Fund Trust

Aberdeen Fund

The size of the asset pool under Steadman's

management grew dramatically during the 1960's.

At its height Steadman's investment advisory

organization had some $250 million under manage-

ment. Much of this growth came from acquisitions.

Other investment advisers were bought up. The

requisite capital was raised in the main by

borrowing from commercial banks. The banks

from which Steadman and SSC borrowed were also

the banks in which the Steadman-managed funds

kept their cash.

These complex and protracted proceedings present

many issues. We begin with those that arise

out of the banking relationships to which we

have just referred.

II. BANKING RELATIONSHIPS

By reason of his predominant role in the manage-

ment of the funds, Steadman was in a position

to choose the banks in which they kept their

- 22 -

cash and to determine the amounts that would be

kept on deposit in checking accounts that paid

no interest. 3/

3/

Section 17(f) of the Investment Company

Act requires an investment company of the

management type to place its securities

and similar investments in the custody of

a bank, a stock exchange member or itself.

If a bank is selected as custodian, the

present law requires the investment company

to keep all its cash assets in such bank

(subject to certain exceptions). Although

not required during the period relevant to

this case, it was Steadman's practice to

keep the funds' cash assets in the custo-

dian bank. This practice had been recom-

mended in our report on the Public Policy

Implications of Investment Company Growth,

H.R. Rep. No. 2337, 89th Cong., 2d Sess.,

336 (1966). The terms "cash assets"

includes, for example, the proceeds from

the sale of portfolio securities, interest

and dividends derived from portfolio

securities and any judgments realized by

the investment company. Checking accounts

are used principally for dividend distribu-

tions to fund shareholders, redemptions,

and current expenses.

ao 39 «

Starting in December 1965, Steadman and SSC

began borrowing from the Washington bank in

which the Steadman Funds then kept their

checking accounts. By mid-1968, Steadman

himself owed that bank over $1 million, and

SSC, although it had repaid its loans, had

borrowed up to $200,000. During those two and

a half years, Steadman asked the bank to direct

at least $50,000 of that bank's portfolio

brokerage business to SSC's broker-dealer

subsidiary, Republic Securities Corporation.

And Republic, a relatively small, unseasoned

firm, actually got $25,000 a year in brokerage

from the bank.

To expand the pool of assets under his manage-

ment, Steadman arranged to have SSC buy two |

more investment advisory organizations. To

finance these purchases, he asked the bank to

lend SSC $2 million on an unsecured basis. But

it turned him down, finding inadequate assurance

that SSC, whose operations had thus far been

unprofitable, would be able to repay. Only

after retaining two prominent investment

bankers to locate a receptive bank did Steadman

find a New York bank willing to grant SSC the

loan.

~ 24 =

At about the time that the loan was agreed to,

Steadman and SSC recommended to the directors of

the three mutual funds for which SSC was invest-

ment adviser that those funds transfer their

bank accounts to the New York bank which was

lending the money. The directors were told that

the New York bank's custodial fees were lower

than those of the Washington bank. The services

that the New York bank was capable of supplying

were also lauded. But no mention of the loans

was made. The funds' boards knew nothing at all

about them when they approved the transfer. 4/

Bereft of the funds' accounts, the Washington

bank called its loans to Steadman. Steadman

succeeded in getting a second Washington bank

to lend him enough to repay the first. But by

1970, the market value of the collateral secur-

ing that loan had fallen materially. So this

second Washington bank called its loan.

Steadman got a 90-day extension. Two days later,

4/ When Steadman moved his banking business

to New York, he asked the bank there to

give Republic some brokerage to make up

for the lost income from the Washington

bank. But the New York bank gave Republic

very little business.

» 26 «

one of the funds bought a 90-day certificate of

deposit from that bank in an amount in excess

of the loan.

Faced with the need to repay the second bank's

loan at the end of 90 days, and also confronted

by problems in meeting SSC's obligations on the

larger loan from the New York bank, Steadman

and SSC sought out yet another Washington bank

which would lend them enough to cover both

loans, that is, over $4 million. All they got

was enough to pay off the loan from the second

Washington bank. Shortly thereafter, this

third Washington bank received the account of a

Steadman-managed fund whose account had been in

St. Louis. Again, that fund's board was not

told about the loan when it approved the

transfer. 5/

Steadman said nothing about his or SSC's loans

in any of the materials sent to the funds’

actual or prospective shareholders. Nor did

any report filed with us even hint

5/ A week before the board met, Steadman

whote to the St. Louis bank requesting it

to waive its notice period and to send its

records to the designated Washington bank.

« 26 «

at the loans. Yet it would, we think, have

been obvious to anyone (let alone someone with

Steadman's extensive legal and financial

experience 6/) that the banking relationships

were of considerable moment to anyone trying to

formulate rational decisions about the invest-

ment merits of the Steadman-managed funds. 7/

Steadman was trained as a lawyer and prac-

ticed law for some years. The administra-

tive law judge said in his initial decision

that "Steadman, a lawyer, should have been

particularly aware of the duties and

responsibilities of a fiduciary."

The administrative law judge's observa-

tions quoted in the preceding footnote

about the effect that Steadman's legal

knowledge should have had on his sensitivity

to fiduciary duties applies a fortiori to

the effect that his experience at the bar

must have had on his awareness of the

disclosure obligations that the federal

securities laws impose on issuers and

underwriters. Any lawyer whose involvement

with financial matters is as intimate and

(Continued)

o 27 «

Steadman had a self-interest in cultivating and

mollifying the banks from which he

(7 Continued)

as long as Steadman's was knows how rigor-

ous those obligations are. Moreover,

Steadman must or at the very least should

have realized that he could not find

shelter from that rigor under the umbrella

of privacy. Well before the first of the

loans here in issue was made we had held

in an unusually well-publicized stop order

case that "We cannot agree ... that disclo-

sure of Glickman's borrowings and pledges

would have been an ‘unwarranted revela-

tion' of Glickman's personal affairs. An

insider of a corporation that is asking

the public for funds must, in return,

relinquish various areas of privacy with

respect to his financial affairs which

impinge significantly upon the affairs of

the company. That determination was made

by the Congress over 30 years ago when it

expressly provided in the Securities Act

for disclosure of such matters as remunera-

tion of insiders and the

(Continued)

» 26 «

borrowed. That self-interest led him to keep

unduly large sums unnecessarily idle in checking

accounts to the banks' benefit but to the funds'

detriment. Whether this actually happened or

not is unimportant. The heart of the matter is

that Steadman had disabled himself from looking

at the funds' checking account balances in a

wholly disinterested way, with an eye single

to the funds' best interests. 8/

(7 Continued)

extent of their shareholdings in and the

nature of their other material transactions

with the company." Franchard Corporation,

42 S.E.C. 163, 174 (1964). To this passage

a footnote citation (n. 29) to "Schedule A

to the Securities Act, Paragraphs 14,

18-20, 24-25" was appended.

8/ The order for proceedings does not charge

that the bank balances were excessive.

Hence we do not find that they were. But

we note that the balances were substantial.

The unproductive balances in the New York

bank at times exceeded $9 million.

» £9 «

Investors had a right to know this. So Steadman

had a duty to reveal his collateral banking

relationships, which were such that a reasonable

investor or prospective investor could reasonably

have drawn adverse inferences about the character

of the funds' management. 9/

9/ As we said in Franchard Corporation, 42

S.E.C. 163, 169-170 (1964):

"Of cardinal importance in

any business is the quality

of its management. Disclo-

sures relevant to an evalu-

ation of management are

particularly pertinent

where, as in this case,

securities are sold largely

on the personal reputation

of a company's controlling

person. The disclosures in

these respects were

materially deficient ....

"Evaluation of the quality

of management--to whatever

extent it is possible--is an

essential ingredient of

(Continued)

- 30 =-

Those interested in mutual fund investment have

hundreds of funds to choose from.

(9 Continued)

informed investment

decision. A need so

important cannot be

ignored, and in a variety

of ways the disclosure

requirements of the

Securities Act furnish

factual information to

fill this need .... To

permit judgments whether

the corporation's affairs

are likely to be conducted

in the interest of public

shareholders, the registra-

tion requirements elicit

information as to the

interests of insiders

which may conflict with

their duty of loyalty to

the corporation."

These observations are especially pertinent

where purely financial institutions,

~ 31 «

so-called financial intermediaries, are

involved. See Clark, The Soundness of

Financial Institutions, 86 Yale L. J. l,

73 (1976): "Management ... integrity may

be ... crucially relevant."

Thus they need data enabling them to make an

informed assessment of the comparative merits

of the products offered by a host of competing

investment advisers. 10/

10/ Some think that a mutual fund is essentially

the brand name under which an investment

adviser sells its services to the public.

See Lobell, Rights and Responsibilities in

the Mutual Fund, 70 Yale L. J. 1258 (1961);

Lobell, The Mutual Fund: A Structural

Analysis, 47 Va. L. Rev. 181 (1961).

Though we consider this so-called "shell

theory" an incomplete guide to public policy

(see our 1966 report to the Congress on the

Public Policy Implications of Investment

Company Growth (House Report No. 2337, 89th

Cong., 2d Sess.) at pp. 75-76), it is by no

means entirely fallacious. Indeed, it is

(Continued)

» 22 «

Steadman's prospectuses and reports concealed

important data of that kind. It follows that

those prospectuses and those reports were

materially deceptive. 11/

(10 Continued)

E

quite realistic. One who buys mutual fund

shares is buying professional investment

management. What could be more important

to such a person than information that

helps him appraise the extent to which a

particular manager has enmeshed himself in

conflicts of interest that competing

managers have avoided? See Tannenbaum v.

Zeller, 552 F.2d 402 (C.A. 2, 1977): "A

mutual fund is a mere 'shell,' a pool of

assets that belongs to the individual

investors holding shares in the fund. The

Management of this asset pool is largely

in the hands of an investment adviser,

which generally originates the fund ....

The adviser ... operates or supervises.

Adequate prospectuses would not only have

described the relationships, but called

(Continued )

- 33 -

Accordingly, we find, as did the administrative

law judge, that Steadman, SSC and

(11 Continued)

attention to the bearing that they might

have on the funds' cash management policy.

That is so because a Securities Act prospec-

tus must make the essential facts clear to

the ordinary investor. See Universal

Camera Corporation, 19 S.E.C. 648, 652

(1945). This means that those facts must

be presented in such form as to make their

Significance readily ascertainable."

Franchard Corporation, 42 S.E.C. 163, 184

(1964). Proper prospectuses would have led

at least some investors to take a critical

look at the size of the funds' non-interest

bearing bank balances, to wonder about the

wisdom of paying sales loads (though the

Steadman funds are now no-load, they were

sold through dealers on a load basis during

the relevant period) and management fees

for the privilege of keeping substantial

sums idle in checking accounts, and to

consider other mutual funds that put their

(Continued)

- 34 -

Republic, during the period from December 1965

to February 1972, willfully violated

(11 Continued)

cash balances to productive use by placing

them in treasury bills and other money

market instruments.

Acceptable proxy-soliciting materials

would have had the same effect. True,

those materials were addressed to exist-

ing shareholders. And it is also true that

given the realities of the power relation-

ships in most mutual funds, it is improbable

(though not impossible) that proper dis-

closure in the proxy-soliciting materials

would have led to Steadman's ouster by a

shareholder vote. Such things happen.

But they happen rarely. What happens

often, however, is a wave of shareholder

redemptions evoked by widespread dissatis-

faction. That would have mattered to

Steadman. His organization's advisory

fees, like those of most other investment

advisors, were based on the amounts managed.

(Continued)

o 25 «&

and willfully aided and abetted violations of

the antifraud provisions of the Securities,

Securities Exchange, and Investment

(11 Continued)

Secondly, adequate disclosure to the exist-

ing shareholders could have led some of

them to institute derivative or class

actions against the management. Such

actions would have been predicated on the

premise that the banking relationships were

a breach of fiduciary duty. We need not

and do not decide whether such actions (some

of which are now pending, have been touched

off, we surmise, by the initiation of these

public proceedings) would have resulted in

judgments for the plaintiffs. What matters

for present purposes is that such cases

could have been filed and that, if filed,

they could scarcely be shrugged off as

frivolous. One of the key aims of the

disclosure provisions of the statutes we

administer is to alert investors to facts

indicating that they or their corporations

may have valid claims against management

(Continued)

. 56 =

Advisers Acts. 12/ We further find that

Steadman and SSC willfully violated or willfully

aided and abetted violations by others of the

Investment Company Act's reporting and proxy-

solicitation provisions. 13/

(11 Continued)

and to facilitate the prosecution of such

causes of action. See Mutual Benefit

Realty Fund, Securities Exchange Act

Release No. 12195 (March 14, 1976), 9 SEC

Docket 149, 151 n. 14. See also n. 25,

infra.

Section 17(a) of the Securities Act;

Section 10(b) of the Exchange Act and Rule

10b-5 thereunder; and Sections 206(1) and

(2) of the Investment Advisers Act.

With regard to proxy solicitations,

Section 20(a) of the Investment Company Act

and Rule 20a-1 thereunder prohibit any per-

son from soliciting or permitting the use

of his name to solicit any proxy with

respect to any security issued by a

(Continued )

~ 29 =

Respondents maintain that the funds' bank

accounts were wholly unrelated to the loans and

(13 Continued)

registered investment company unless in

compliance with not only Rules 20a-2 and

20a-3, but also all rules adopted pursuant

to Section 14(a) of the Exchange Act. Rule

20a-3 requires the description of "any

material proposed transactions, to which

the investment adviser of the investment

company or any ... subsidiary of the invest-

ment adviser was or is to be a party." And

Rule 14a-9 under the Exchange Act makes it

unlawful to solicit proxies with proxy

materials which contain material misstate-

ments or omissions, which is what the funds

did. Similar prohibitions are contained in

Section 34(b) of the Investment Company Act

for reports filed or transmitted pursuant

to that Act. And the funds' annual reports

on Form N-1R and quarterly reports on Form

N-1Q0 failed to make these material disclo-

sures, as also required by Rules 30a-2 and

30bl-1 for reports filed pursuant to Section

30 of the Investment Company Act and

Sections 13 and 15(d) of the Exchange Act.

- 38 -

the brokerage business that went to Steadman

and his investment advisory organization.

Taking vehement exception to the administrative

law judge's finding that Steadman was continually

bargaining for loans by holding out the funds'

checking accounts as a quid pro quo, they

contend that the record shows only a series of

coincidences that involved one bank after

another and that went on for year after year.

We need not and do not pass on the precise nature

of the relationship between the funds' deposits

and the benefits that Steadman obtained from the

banks 14/ in which those deposits were kept. 15/

14/ Consequently, we need not pass upon respon-

dents' contention that the administrative

law judge improperly extracted from the

documentary evidence statements showing

that when the loans were sought, not only

from the banks which granted them but from

several which declined, references were

made to the funds' deposits.

15/ But it is hard to believe that there was no

link at all between the funds' deposits and

(Continued)

a» 39. «

Whether the banking relationships were or were

not corrupt is beside the point for present

purposes. What matters is that reasonable

investors could reasonably have deemed those

relationships "corrupting." 16/ And that is

what brings the antifraud provisions to bear

on the affair.

(15 Continued)

the benefits to Steadman. We note in this

regard that save for one case in which

special circumstances deprived Steadman of

the power to disrupt a historic banking

relationship that he had inherited from the

fund's previous adviser, Steadman always

saw to it that the funds kept their cash

in banks that lent him money.

Cf. Mr. Justice Jackson's opinion in

Mosser v. Darrow, 341 U.S. 267, 271 (1961),

where he spoke for the Court and observed:

"Equity tolerates in bankruptcy trustees

no interest adverse to the trust. That is

not because such interests are always

corrupt but because they are always

corrupting."

- 40 =

Steadman himself may have believed that his

actions were proper, and did the funds no harm.

He also may not have planned to cause the

funds to keep cash unnecessarily idle in

checking accounts, rather than investing it

for the funds' benefit.

But Steadman had a duty to disclose the

facts that investors and their advisers needed

in order to arrive at their own informed

judgments about:

(A) The investment significance of his

relationships with the banks in which the

funds' cash was kept; and

(B) The implications of those relationships

in assessing the quality and the integrity of

his management.

We conclude that Steadman's long continued

practice of borrowing heavily from the very

same commercial banks in which he caused the

funds to keep large sums on deposit had a

potential for subordinating the funds'

interests to Steadman's need for bank loans.

Hence the subject was of sufficient moment to

create "a substantial likelihood that a

reasonable shareholder would consider it

- 4] =

important" in making his decision. 17/

Accordingly, we hold the undisclosed banking

relationships "material."

The collateral banking relationships were among

the intricacies attendant on an investment in a

Steadman-managed fund. And the central purpose

of the disclosure provisions of the securities

statutes is to give investors "the means of

understanding the intricacies of the transaction

into which they are invited." 18/

It follows that Steadman was under a duty to

bring the "complex of circumstances ... to [the

17/ TSC Industries, Inc. v. Northway, Inc.,

426 U.S. 438, 449 (1976).

18/ The quotation is from the House report on

the bill that eventually became the Securi-

ties Act. H.R. Rep. No. 85, 73d Cong., lst

Sess. 8 (1933). And as we observed of this

quotation in another case not long ago, "The

thought illumines the Exchange Act as well."

Multi-Benefit Realty Fund, Securities

Exchange Act Release No. 12195 (March 1l,

1976), 9 SEC Docket 149, 154 n. 26.

a £42 @

investor's] attention lucidly and force-

fully." 19/

True, such breaches must be found "willful"

before we can take cognizance of them in a pro-

ceeding of this character. But this does not

mean that those subject to our administrative

disciplinary jurisdiction can immunize themselves

from its impact by substituting their own notions

about disclosure for those adopted by the Congress

and applied by the courts. 20/ As the Court of

Appeals for the Second Circuit observed in Tager

v. S.E.C. 21/ and again in Lipper v. S.E.C. 22/:

19’ Franchard Corporation, 42 S.E.C. 163,

181 (1964).

20/ See 2 Loss, Securities Regulation 1309 (2d

ed. 1961); 5 id. 3368-3374 (1969 supp. ).

344 F.2d 5 (1965), affirming our decision

in Sidney Tager, 42 S.E.C. 132 (1964).

R

22/ 547 F.2d 171 (C.A. 2, 1976), affirming our

decision in Arthur Lipper Corporation,

Securities Exchange Act Release No. 11773

(October 24, 1975), 8 SEC Docket 273, but

modifying the sanctions on the two respon-

dents that appealed.

o AE a

"It has uniformly been held that

'willfully' in this context means

intentionally committing the act

which constitutes the violation.

There is no requirement that the

actor also be aware that he is

violating one of the Rules or

Acts." 23/

Respondents tell us that all this is now mere

history. They say that the Supreme Court's

decision of March 30, 1976, in Ernst & Ernst v.

Hochfelder 24/ laid down a new rule under which

no adverse findings can be made against them

under any of the antifraud sections because

there is no evidence that they intended to

deceive. 25/

23/ 344 F.2d at 8, quoted with approval in 547

F.2d at 180.

425 U.S. 185.

e

Our staff, on the other hand, maintains not

only that intent to deceive is irrelevant,

but that deception itself is irrelevant.

In its view, the collateral banking rela-

tionships would have run afoul of the

antifraud provisions even if disclosed. It

(Continued)

“ £h «

But Hochfelder was a private action for money

damages. The plaintiffs were seeking to recover

for negligent nonfeasance. Their allegations

amounted at most to a claim that the defendant,

an accounting firm that never made any represen-

tations to them and with whom they were never in

privity, had carelessly aided and abetted someone

else's violation of the securities laws. Thus

the question presented was "whether a private

cause of action for damages will lie under

§ 10(b) and Rule 10b-5 in the absence of any

allegation of 'scienter' -- intent to deceive,

manipulate or defraud." 26/ The Court concluded

(25 Continued)

reasons that there was so egregious a breach

of fiduciary duty here that Steadman could

no more cure his trafficking in the funds'

deposits by making a clean breast of it

than an embezzler can cure his embezzlement

by disclosing it. The administrative law

judge took this view. We eschew such specu-

lations. Had the banking relationships

been disclosed, an altogether different

case would be presented. That case is not

before us. And we do not decide it.

26/ 425 U.S. at 193.

» 2s os

that it could not. And since the plaintiffs

"had proceeded on a theory of liability premised

on negligence, specifically disclaiming that

Ernst & Ernst had engaged in fraud or intentional

misconduct," 27/ their complaint was dismissed. 28/

aff) 6A. OL. 215.

28/ In their search for pecuniary redress, Ms.

Hochfelder and her co-plaintiffs focused

on a deep pocket at the outermost fringes

of the scene. The plaintiffs conceded

that they had not in fact relied on what

the defendant did. Nor were the plaintiffs

within the class to’ whom the defendant

owed a common law duty of due care. 425

U.S. at 192, n. 9. «Hence even in a private

action founded solely on Rule 10b-5, the

Hochfelder rule would not necessarily

preclude a claim against someone like

Steadman who far from being a peripheral

actor was at the very center of a complex

web of investment companies, investment

advisers and principal underwriters, was a

fiduciary for those investment companies

and for their shareholders, was subject to

(Continued)

—_

The instant case does not resemble Hochfelder.

This is not a private action for money damages.

It is a proceeding initiated by a public author-

ity for the prophylactic purpose of preventing

future harm to the public interest. 29/ Nor

(28 Continued)

affirmative disclosure duties imposed by

federal statute, and who would even at

common law have been deemed subject to a

far higher standard of care than that incum-

bent on an ordinary businessman. See Hun

v. Cary, 82 N.Y. 65 (1880); Medford Trust

Co. v. McKnight, 292 Mass. 1, 197 N.E. 649

(1955). The Supreme Court's view seems in

accord. Santa Fe Industries, Inc. v. Green,

U8. » S7.2.68. i262, 2299 a. ii

91977).

Cf. n. 12 to the Hochfelder opinion:

"Since this case concerns an action for

damages, we need not consider whether

scienter is a necessary element in an

action for injunctive relief under § 10(b)

and Rule 10b-5."

(Continued)

— ae

does this case rest solely on Rule 10b-5. 30/

Indeed, it does not turn on 10b-5 at all. 31/

(29 Continued)

We are not unmindful of the Second Circuit's

suggestion in Lipper v. S.E.C., 547 F.2d

Avi, 180-61 n. 6 (C.A. 2, 1976), that

disciplinary proceedings may be more akin

to actions for damages than to those for

injunctive relief. But it did not decide

"that the Hochfelder culpability standard

applies in disciplinary proceedings." All

that it did was to "assume, arguendo,"

that Hochfelder governs such proceedings.

And, in any event, Lipper's formulation of

willfulness (see 547 F.2d at 181) would be

more than adequately met here.

Section 17(a) of the Securities Act and

the provisions of the Investment Company

Act cited inn. 13, supra, are independent

bases for liability.

Section 17(a) of the Securities Act, which

has been in effect since 1933,

(Continued )

eo Se

The references to that rule in the order for

%

(31 Continued)

makes it unlawful "(2) to obtain property by

means of any untrue statement of a material

fact necessary in order to make the state-

ments made, in light of the circumstances

under which they were made, not misleading;

(3) to engage in any transaction, practice

or course of business which operates as a

deceit upon the purchaser." In Hochfelder

the Supreme Court pointed to the absence of

Similar language in Section 10(b) of the

Securities Exchange Act, as distinguished

from Rule 10b-5. The Court viewed this

lack as a significant guide to 10b-5's

scope. 425 U.S. at 214.

We note in this regard that a contempo-

raneous comment on Section 17 states that it

"makes unlawful even innocent acts to obtain

money or property by means of untrue state-

ments of material facts or omissions to

state material facts." Douglas and Bates,

The Federal Secutities Act of 1933, 43 Yale

(Continued)

/

«= 46 «

proceedings and in this opinion are merely

cumulative. 32/

31 Continued/

&

L. J. 171, 181 (1933). See S.E.C. v. Van

Horm, 372 F.2d 161, 165 (C.A. 7, 1966):

"In view of the plain language employed by

Congress, it would be presumptuous on our

part to hold that the applicability of the

clauses involved [Section 17(a)(2) and

Section 17(a)(3) of the Securities Act] is

dependent on intent to defraud." Hence

Hochfelder has no bearing on cases brought

under Section 17(a) of the Securities Act.

S.E.C. v. World Radio Mission, Inc., 544

P.2@ 535, $41. n. 10 (C.A. 1, 1976).

Compare Crow, brourman & Chatkin, Inc., 42

S.E.C. 938, 945 (1966): "[T]he violations

found with respect to these provisions may

be viewed as cumulative."

« $0 «

More could be said about our view of Hochfelder.

But that is unnecessary. 33/ Respondents gain

nothing from Hochfelder because the Hochfelder

standard has been met.

What we have here is:

(1) a duty to reveal; plus

(2) an intent to conceal; and

(3) actual concealment.

This is not a "negligence" case. There was no

accident, no monetary slip, no failure to act

reasonably under stress. These were no ordinary

commercial loans. They were large in amount and

semi-permanent in duration. Borrowing from the

banks in which his funds kept their cash was a

way of life for Steadman. It was basic to his

modus operandi. So he could scarcely have

forgotten these banking relationships.

33/ However, we think it appropriate to note

that we do not construe Hochfelder as alter-

ing the rule laid down in Hanly v. S.E.C.,

415 F.2d 589, 597 (C.A. 2, 1969) that"

proof of specific intent to defraud ... is

irrelevant in broker-dealer proceedings."

- 51 -

Steadman did not choose to testify. Hence his

state of mind must be inferred from the circum-

stances. 34/ And the pertinent circumstances

are these:

(1) He concealed the loans from the funds' di-

rectors and did not disclose them to investors.

(2) He did so for many years.

(3) Though he claims to have relied on the

advice of counsel with respect to other

34/ That would probably be so even if he had

testified. As we said in The Federal

Corporation, 25 S.E.C. 227, 230 (1947):

"Since it is impossible to

probe into the depths of a

man's mind, it is necessary

in the usual case (that is,

absent an admission) that

the finding ... be based on

inferences drawn from circum-

stantial evidence." Cf.

Lawrence H. Ripp, Securities

Exchange Act Release No.

13198 (January 24, 1977), 11

SEC Docket 1555, 1556.

oi a

matters, he makes no such claim with respect to

his banking relationships. 35/

Accordingly, we find that Steadman and his

corporate instrumentalities intended to deceive.

Moreover, we agree with the respondents that

intent is relevant here. That is so not because

we consider intent pertinent to the willful

violation issue, but because we deem it highly

germane to determining the quantum of the

remedial action, if any, that due regard for

the public interest requires us to take.

Steadman's systematic, calculated and protracted

concealment of his collateral banking relation-

ships is enough in itself to brand him an unfit

manager of other people's money. Even if there

were nothing to this case but the undisclosed

collateral banking relationships, we should be

35/ Such reliance would not negate the willful

violations. But it is often of great

mitigative weight. Steadman is a lawyer

himself. So he may have relied on his own

view of what the law was. If he did that,

he must have realized that he was going

close to the line and assuming serious

juridical risks.

— . oe

constrained to bar Steadman from both the invest-

ment company and the investment advisory

businesses.

III. THE BANKING RELATIONSHIPS --

REGULATORY ASPECTS

Our staff maintains that there is much more to

the banking relationships than the mere failure

to disclose them. 36/ It says that those rela-

tionships were flatly prohibited by the Invest-

ment Company Act. Three sections of that statute

are invoked. They are:

(1) Section 15(a)(1) of the Investment Company

Act, which makes it "unlawful for any person to

serve or act as investment adviser of a regis-

tered investment company, except pursuant to a

written contract, which ... precisely describes

all compensation to be paid thereunder"

(emphasis added);

36/ We have already touched on one of its

contentions in this area. Seen. 25,

Supra.

os S4 «

(2) Section 17(d), which together with our

Rule 17d-1 thereunder, requires that "joint

participations" between investment companies

and their affiliated persons be first

scrutinized by us "for the purpose of

limiting or preventing participation by

such registered or controlled company on a

basis different from or less advantageous

than such other participant"; 37/ and

(3) Section 17(e)(1), which provides that

"It shall be unlawful for any affiliated

person of a registered investment company,

or any affiliated person of such person--

acting as agent, to accept from any source

any compensation (other than a regular

Salary or wages from such registered company)

for the purchase or sale of any property to

or for such registered company or any

controlled company thereof, except in the

course of such person's business as an

underwriter or broker." (Emphasis added. )

For Section 15(a)(1)'s purposes, the loans

to Steadman and to SSC were "compensation"

37/ The quotation is from the statute.

— |

to them. 38/ And the brokerage business

that the banks gave Republic at Steadman's

Respondents argue that the loans were

"standard commercial loans made at prevail-

ing interest rates in accordance with

standard banking practices." They contend

that such loans are not "compensation" to

the borrower. In support of their position

they cite Imperial Financial Services, Inc.,

42 S.E.C. 717, 728 n. 16 (1965). They say

that the loans gave them nothing but the

duty to repay them with interest.

We disagree. Loans are of economic benefit

to those who receive them. Hence they are

"compensation." Our 1965 Imperial decision

is not to the contrary. All that the

Commission held there was that a loan at 7%

interest back in 1960 (when interest rates

were low and 7% was an extremely generous

rate) was a "less clear instance of the

receipt of compensation" than another loan

involved in that case which bore no interest

at all. The Commission did not hold that

the 7% loan was not "compensation." It

(Continued)

a 88 «

instance was "compensation" to it, to its

parent SSC, and to Steadman himself. 39/

But it does not follow that this was the

type of compensation that had to be spelled

out in the advisory contracts.

(38 Continued)

Simply said, "[W]Je make no finding

with respect to this transaction." In

our view that was simply a determination

that it was unnecessary or inappropriate

to reach the question on the record

that the Commission had before it in

Imperial (a case that was settled and

in which the record consisted of a

Stipulation) and not as a holding that

an interest-bearing loan can never be

deemed "compensation."

Respondents point out that the commis-

sions "were earned in the course of

-..- business as a broker for the banks

and ... paid for services actually

rendered in executing ... purchase/sale

transactions." We agree. But we do

not see how that deprives those commis-

sions of their compensatory character.

- 97 «

Section 15(a)(1)'s command goes only to the

"compensation to be paid thereunder." The

word "thereunder" is significant. We think

that it means that the only compensation

that counts for that purpose is compensation

paid directly or indirectly by the investment

company itself. When the authors of the

Act wanted to reach "any compensation"

"from any source," they said so. 40/

Accordingly, we hold that the Act did not

mandate references to the collateral banking

relationships in the advisory contracts. 41/

Section 17(d) and Rule 17d-1 thereunder

present closer questions. Section 17(d)

extends to "any transaction" in which a

registered investment company "is a joint

or a joint and several participant" with

any of its affiliated persons, any affili-

ated person of such an affiliated person,

any of its principal underwriters, or any

40/ Section 17(e)(1).

41/ It does not follow that such references

would have been improper or inappro-

priate. Their inclusion might well

have been desirable.

o S86 «

affiliated person of any of its principal

underwriters.

The key phrases in this subsection are "any

transaction" and "a joint or a joint and several

participant." The generality of this language,

together with the paucity of judicial decisions

construing it, has led to considerable uncer-

tainty as to its exact scope. The parties'

positions are far apart.

The Investment Company Institute would require

that there be a joint venture between the invest-

ment company and the affiliate in pursuit of pro-

fit. This is too narrow a construction. Section

17(d) refers to a participant in a joint venture

and to participation which is either "joint" or

"joint and several." The joint venture concept

is well known in the law. Had Congress intended

to limit the reach of Section 17(d) to that

concept, it would have said so.

As the Court of Appeals for the Second Circuit

said in S.E.C. v. Talley Industries, Inc., 42/

42/ 399 F.2d 396 (1968), cert. denied, 393

U.S. 1015 (1969).

o $6 «

the leading case under Section 17(d) -- although

not in point here on its facts:

"TAjny idea that § 17(d) is

limited to the typical joint

venture in which each of the

parties has a fractional share is

negated by the point that its

very life is to limit or prevent

participation by the investment

company ‘on a basis different

from or less advantageous than

that' of the affiliated person." 43/

The staff, on the other hand, would give Section

17(d) a very broad construction reaching most

economic relationships in which an investment

company is on one side and one of its affiliates

is on the other. That would make a number of

the Act's other provisions redundant. 44/ We

are reluctant to adopt an interpretation so

broad. That is so even though "transaction" is

undoubtedly a broad term. As the Court of

43/ 399 F.2d at 402.

44/ Sections 17(a) and 17(e) would probably

be among those sections.

= €0 «

Appeals for the Second Circuit noted in Talley,

"transaction" may mean "To prosecute negotiations;

to carry on business; to have dealings ***." 45/

The concept of a "joint or joint and several"

transaction is unusual. 46/ Applying the Talley

principle that "some element of combination is

required" 47/ but that a "loose kind of combina-

tion" may be sufficient on the basis of a liberal

construction of the Act, 48/ three party

45/ 399 F.2d at 402, quoting Webster's New

International Dictionary (2d ed.) 2688.

46/ Resort to the law disctionaries is not

overly help.ul. According to Black's Law

Dictionary (4th ed. 1968) and Ballantine's

Law Dictionary (3rd ed. 1969), “several”

means, essentially, “not joint." Joint and

several is a procedural term, applicable

primarily to contracts, and means in sub-

stance that a creditor acquires the option

to sue his debtors individually or as a

group.

47/ 399 F.2d at 403.

48/ Ibid.

em ee HF HE SS AHA ee ewe ae lee lee

e 64 «

transactions, such as those present here, would

seem within Section 17(d)'s scope were there a

causal connection between the funds' deposits and

Steadman's loans. If the loans were a "quid pro

quo" for the deposits, or the deposits a "quid

pro quo" for the loans, the "combination" referred

to in the Talley decision would be present. 49/

The funds would be "participants" because the use

of their assets would have been so significant a

part of the total transaction.

In the previous section we observed that "Steadman

always saw to it that the funds kept their cash

49/ This is not to imply that such a causal con-

nection is necessary in every Section 17(d)

case. It is necessary in the present case

because without the participation of the

banks there would be no joint transaction

between the funds and Steadman. By way of

contrast, for example, in the Talley case

the joint transaction was the purchases of

General Time Corporation shares by Talley

Industries, Inc. and its affiliate, American

Investors Fund, Inc. In that situation it

was not necessary for the sellers of such

shares to know that Talley and American

Investors were in a joint transaction for

there to be one.

« 62 ‘a

in banks that lent him money" 50/ and that "this

makes it hard to believe that there was no link

at all between the funds' deposits and the bene-

fits to Steadman." 51/ So it seems highly prob-

able that the loans and the deposits were related

to each other. 52/ Hence the administrative law

judge inferred a causal connection. We find it

hard to say that he erred when he did so. We

have ourselves drawn comparable inferences 53/

in situations that seem analogous. 54/

50/ We noted that there was one exception,

which involved a situation beyond Steadman's

control.

Ie

Note 15, supra.

The contrary view leaves us with a most

8

remarkable series of coincidences.

53/ See, e.g., C. Gilman Johnston, 42 S.E.C.

217, 219 (1964); Lawrence H. Ripp, Securities

Exchange Act Release No. 13198 (January 24,

1977), 11 SEC Docket 1555, 1556.

54/ In this very case, we have already

drawn one with respect to Steadman's

state of mind. See text at n. 34, supra.

» 45

On this record, however, we are disinclined to

infer the causality needed to bring Section

17(d) to bear on this situation. Much of the

testimony is to the contrary. 55/

Some of the bankers with whom Steadman dealt

testified that in their minds there was no

connection between the loans and the depos-

its. They claim to have viewed them as

independent of each other. Their testimony

is offset by papers that point to the oppo-

site conclusion. However, the admissibility

of those papers is challenged. So is their

probative force. Finally, some of the very

testimony on which the respondents rely can

be read favorably to the Division. Some

banker-witnesses distinguished the loans

themselves from the interest rates that they

bore. They insisted that the loans were

unconnected to the deposits. But they con-

ceded that balances on deposit normally affect

interest rates. An important banker-witness

characterized the determination of the

interest rate as a "pricing decision" and

testified that ample balances "would tend

to lower the interest rate."

» 64 @

So questions of fact are raised. 56/ We do not

reach them.

When the case is viewed as a whole, it becomes

apparent that the causality issue is far from

central. The issues we deem crucial relate to

the respondents! duty to disclose. For reasons

already stated, causality has no bearing on

that. Hence we see no pressing need to resolve

the factual questions on which the causality

issue turns.

That precludes us from finding a causal nexus

or a quid pro quo. Without this there is no

basis for inferring a "coibination." And

absent some sort of "combination," however

loose, adverse findings under Section 17(d) are

unwarranted. Hence we make no such findings.

We come now to Section 17(e)(1). That prevented

the respondents from accepting "from any source

any compensation (other than a regular salary

or wages ...) for the purchase or sale of any

56/ With respect to the loans themselves, as

distinguished from the interest rates that

they bore, there is no live testimony that

Clearly supports the quid pro quo hypothesis.

« 65 «

property to or for" their investment company

clients. If the loans and the brokerage business

received from the banks were "compensation" to

the recipients for purposes of Section

15(a)(1), 57/7 they were also "compensation" to

them for purposes of Section 17(e)(1). But

(save for the certificate of deposit purchased

from a Washington bank, 58/ which we put to one

Side for the moment), such "compensation" had

no nexus with the purchase or sale of any

investment company property.

That is obvious with respect to the brokerage

commissions. They were generated by the banks'

portfolio transactions. The investment companies'

portfolios were uninvolved.

What of the checking account balances? Those

were the funds' property. But that property

was neither bought nor sold. Nothing was

bought from the banks when deposits were made.

Nor was anything sold to them when checks were

57/ See note 38, supra.

58/ See text following note 4, supra.

- 66 =

written. What commercial banks sell to their

demand depositors is services, not property. 59/

Certificates of deposit are different. They

are not open book accounts but tangible choses

in action. Banks sell them. And customers buy

them. So the Steadman-managed fund that bought

a 90-day certificate of deposit from a Washington

bank purchased property from that bank.

However, it is not clear that the respondents

received any illicit compensation for that pur-

chase. It is true that Steadman owed this bank

a large sum. And it is also true that his loan

came due before the certificate was purchased.

But the loan was extended before the certificate

was purchased. The two transactions may well

have been related to each other. But the record

59/ Our staff argues that the funds' contractual

rights to custodial services from the banks

were "property." It also suggests that the

custodial agreements involved the acquisi-

tion of space in the offices of the various

banks for the safeguarding of securities

and that the funds' interests in this space

were their property. These contentions are

ingenious but unpersuasive.

» 67 =

is not clear enough on this point to warrant an

adverse finding. Accordingly, we find nothing

in the banking phase of the case that violated

Section 17(e)(1).

IV. ADVISORY FEES

The advisory agreements between SSC and two of

the funds that it managed limited the advisory

fee to 1% of the fund's average net assets. 60/

At the end of the fiscal year, it became apparent

that the payments to SSC had exceeded that 1%

maximum. 61/ So SSC owed the funds money. It

60/ For a discussion of such limitations and

their background, see Ellis, MutualFund

Expense Limitations, 7 Review of Securities

Regulation 932 (1974).

61/ In one case the year involved was the one

that ended on June 30, 1970. In the other,

the fiscal year closed on January 31, 1971.

The overruns were caused by sharp declines

in the value of the funds' assets. Those

declines caused the aggregate advisory fee

for the whole year to be appreciably lower

than anticipated during the course of the

year.

« 6¢

had a $155,000 obligation to one fund. And it

owed the other $105,000.

SSC did not refund that $260,000 immediately.

Instead it resorted to installments. These

were paid monthly over time. Eventually, the

entire $260,000 was returned to the funds with

interest at 6% from the dates on which the

funds' claims ripened.

The administrative law judge found that:

(A) SSC's duty to refund arose as soon as the

year-end computations were made.

(B) SSC was unable or unwilling to discharge

that duty promptly because it was in serious

financial straits at the time.

(C) During the period that elapsed between the

dates on which SSC became obligated to reimburse

the funds and the date on which full reimburse-

ment was finally made, SSC had the use of

substantial sums that belonged to the funds.

These findings are clearly correct. And we

adopt them as our own. The long and the short

of the whole affair is that money that belonged

to the funds and that they should have been

« 68. «

investing for their shareholders' benefit was

in SSC's coffers and was used by SSC in its

business.

Nothing in the advisory contracts between SSC

and the two advisee-funds in question suggested

that any benefits of this type would inure to

Ssc. In fact, such benefits did inure to SSC.

It follows that:

(i) SSC received compensation from the

two funds in question that, far from being

described in the advisory contracts with the

precision required by Section 15(a)(1) of the

Investment Company Act, was left wholly unmen-

tioned.

(ii) When it did that, SSC willfully

violated Section 15(a)(1), which precludes "any

person" from acting as investment adviser of a

registered investment company pursuant to a

contract that does not "precisely" describe

"all compensation to be paid thereunder."

(iii) SSC's willful violations were willfully

aided and abetted by Steadman himself, the

prime mover in the whole affair. SSC's interest

payments to the investment companies from which

it obtained these extensions of credit do not

«.970 «

divest the transactions of their compensatory

character.

The central fact is that SSC very much wanted to

hold on to the money that it was supposed to

return to the investment companies. The install-

ment payment scheme originated with SSC, not with

its investment company clients. We think it

fairly clear that a debtor who is obligated to

pay in full at once and who succeeds in inducing

his creditor to accept a protracted installment

schedule in lieu of the immediate full reimburse-

ment to which the creditor is entitled reaps an

economic benefit from the installment arrangement.

Had SSC obtained the use of these monies without

any interest at all, it would have received an

outright gratuity from the investment companies.

The interest payments gave the investment com-

panies something of value in return for their

forbearance. Nevertheless, that forbearance was

of substantial economic benefit to SSC. Section

15(a)(1) required precise descriptions of such

benefit in the advisory contracts. 62/

62/ The precise amounts of the advisory fee

overpayments were, of course, unknown until

the fiscal years in question had closed.

(Continued)

«= Ji, ao

Moreover, the 6% interest rate itself involved a

detriment to the investment companies that

received it and a correlative benefit to SSC.

During the relevant period, the prime rate was

in the neighborhood of 8%. 63/

So even if SSC's obligations had been of prime

quality, it would have been getting a bargain

rate of interest from its investment company

clients.

(62 Continued)

|e

N

Some months earlier, however, it became

apparent that the year-end computations

would probably show such overpayments. The

record suggests that SSC realized at that

early date that it would be inconvenient

for it to pay in full at once. At that time

it should have prepared the amendments to

the advisory contracts that were needed in

order to attain its objective. Those amend-

ments should then have been submitted to

special meetings of the affected investment

companies' shareholders with appropriate

disclosure.

See Federal Reserve Bulletin, December

1970, pp. A=-32, A-33.

» 92

Inherent in the statutory requirement that

arrangements of this character be described in

the advisory contracts with precision is the

further requirement that they be accurately and

adequately disclosed in the prospectuses of the

affected investment companies and in their fil-

ings with us. The duty to make these disclosures

was on Steadman and on his alter ego, SSC. Both

of them breached that duty. 64/

We have not overlooked a controversy about the

manner in which SSC computed its advisory fee.

The administrative law judge found that the

64/ We hold, as did the administrative law judge,

that those breaches were in willful violation

of Section 17(a) of the Securities Act,

Section 10(b) of the Securities Exchange Act,

Rule 10b-5 under the latter section, and

Sections 206(1) and 206(2) of the Investment

Advisers Act. We also affirm the adminis-

trative law judge's finding that Steadman

and SSC willfully aided and abetted the

affected funds' violations of Section 34(b)

of the Investment Company Act, which makes

it "unlawful for any person to make any

untrue statement of a material fact in

any ... document filed or transmitted

pursuant to this title."

a 939 «

method of computation used inflated the fees.

But the amounts involved appear immaterial. And

the inflation was temporary.

V. TENDER SOLICITATION FEES

In 1969, tender offers were made for certain

securities held by three Steadman funds. The

offerors paid fees to soliciting brokers.

Steadman had his broker-dealer alter ego,

Republic, tender the funds' securities to the

offerors, in return for which Republic received

the solicitation fees. Those fees came to 2% of

the value of the securities tendered. At first,

Republic retained the entire 2%. Later, however,

it decided that 2% was too much. So it gave half

the fees to the tendering funds. The other half,

i.e., 1% of the value of the securities, Republic

kept. It reasoned that it was entitled to a 1%

fee under Section 17(e)(2)(C) of the Investment

Company Act, which permits a broker to collect a

fee of up to 1% when "acting as broker" for an

investment company with which he is affiliated.

The question for decision is: Was Republic

"acting as broker" in this situation?

The administrative law judge's answer was in

Republic's favor. He thought that "Republic had

» 74 «

done the same things that an unaffiliated

broker would have had to do had the task been

assigned to it." Hence he found no violation

of Section 17(e).

We cannot agree.

Where no brokerage is needed, no fee may be

collected. These fees paid were to "soliciting

brokers." Republic did no soliciting. It

merely transmitted the tendered securities. No

broker was needed for that. 65/

65/ Hence respondents' reliance on First

Multifund of America, Inc., 44 S.E.C. 680

(1971), is misplaced. They are quite right

when they say that the affiliated broker who

was there permitted to retain brokerage

compensation didn't work any harder than

Republic did in this case. Neither case

involved onerous chores. But the laborious-

ness of the task is not the test. Brokerage

services may be and often are essentially

clerical. Nevertheless, they may be needed.

An affiliated broker who executes a regis-

tered investment company's order for 100

shares of American Telephone and Telegraph

(Continued)

a 3 =

The decision to tender had already been made

by the investment adviser. For making such

(65 Continued)

on the New York Stock Exchange does not

have to strive mightily. Nevertheless, he

is entitled to his commission. In First

Multifund, a mutual fund was buying the

shares of other mutual funds. The funds’

shares, like those of Steadman's own funds

during the relevant period, were sold only

through independent broker-dealers. So

anyone who wanted to buy those shares had

to go to a broker. That is not so at all

in the tender offer situation. No investor

needs a broker in order to tender. The

offeror is only too happy to take the

securities directly from the holder. He

saves money that way.

When an investment company is involved and

when that investment company has an affili-

ated broker, that saving for the offeror

is a loss to the investment company.

Hence we have pointed out that "directors

and managers of investment companies ...

(Continued)

-. 36 ~

decisions it received an advisory fee. It could

not pocket a second fee for the very same service

by donning its broker-dealer hat. 66/ Accord-

ingly, we find that Republic, willfully aided and

65 Continued/

may have an obligation to name an affiliated

broker to receive ... solicitation fees."

So the interposition of Republic was quite

proper, indeed laudable. But Republic's

retention of the fees was patently improper.

As the release from which we have just

quoted said, "commissions or fees on the

tender of portfolio securities should not

be retained by the affiliate but should

inure to the benefit of the fund." Securi-

ties Exchange Act Release No. 10102, With-

drawal of Proposed Amendment to Rule 10b-13

under the Securities Exchange Act of 1934

(April 12, 1973), 1 SEC Docket No. li,

page 17.

Provident Management Corporation, 44

S.E.C. 442, 449 (1970), a case on all

fours with the instant case, held this

practice "an impermissible form of personal

(Continued)

» 99 «

abetted by Steadman, willfully violated Section

17(e) of the Investment Company Act.

(66\ Continued)

enrichment." Respondents and the Invest-

ment Company Institute answer that Provident

is not a true precedent because the case

was uncontested and because the opinion

was written in connection with an offer of

settlement. That contention does not go

to the validity of Provident's reasoning.

We think that reasoning valid. And we now

reaffirm what we said there.

Moreover, we think that Provident has been

a precedent since its publication back in

1970. An order that simply accepts an

offer of settlement without comment does

not create a precedent.

But Provident was not such a case. There

we issued "an opinion stating our views on

the issues raised. Such opinions [citations

omitted] are written only after delibera-

tion and analysis akin to that reflected

in our opinions in contested cases. Hence

(Continued)

» 90 «=

VI. LATE FILINGS

The administrative law judge found that

"[t]hroughout the period 1968 through mid-1972

the various Steadman affiliates, including the

registered Steadman Funds advised by SSC,

repeatedly failed to file required reports

within the prescribed time. In many instances

the reports were filed so late as to be of mini-

mal value in serving the purposes intended by

the requirements for filing the reports." 67/

Under the management agreements between Steadman's

management company and the funds, SSC was obli-

gated "to maintain the books of the Fund ... and

to supervise the Fund's relations with its custo-

dian, auditors and federal and state regulatory

bodies." This included the filing of the funds'

(66 Continued)

they are as authoritative as opinions in

those cases." Carl L. Shipley, Securities

Exchange Act Release No. 10870, Investment

Company Act Release No. 8394, Investment

Advisers Act*Release No. 419, p. 4 n. 6

(June 21, 1974), 4 SEC Docket 76, 479-480.

67/ No reports were filed during 1971.

- 79 =

annual reports. 68/ The annual reports of at

least three funds were filed late for three con-

secutive years (1970, 1971, 1972). 69/ And the

annual reports of Steadman's four broker-dealer

firms 70/ were filed late in 1971 and 1972. 71/

68/ Section 30(a) of the Investment Company

Act and Rules 30a-1 and 30a-2 thereunder

require these reports.

69/ Reports were due in 1970, 1971 and 1972 for

Fiduciary Fund and Aberdeen Fund on April 30

of each year, but their 1970 reports were

not filed until September of that year, and

those for 1971 and 1972 not until June 1972.

American Fund's 1970 report, due May 31,

was not filed until December, and its 1971

and 1972 reports not until June 1972.

Similarly, Associated Fund's 1970 report,

due January 28, was not filed until

March 23, and its 1971 and 1972 reports not

until June 1972.

70/ Section 17(a) of the Exchange Act and Rule

17a-5 thereunder require these reports.

71/ Reports for these firms were due on Feb-

ruary 14 in 1971 and 1972, but were not

filed until May 3, 1971 and June 19, 1972.

- 80 =-

Respondents concede that the reports were

late. 72/ They say, however, that those due in

1972 "were filed within a relatively short time

after their due date," and that those due in 1973

"were all timely filed." These contentions do

not go to the principal problem, the 1971 reports.

Those were more than a year late. Respondents

seek to excuse these lengthy delays by

pointing out that finding an adequate

replacement for the funds’ controller who

resigned in 1971 took seven months; that

the whole Steadman complex changed outside

auditors during that year; and that requested

extensions for the late broker-dealer

filings were denied without explanation.

These considerations in no way detract from

the explicit requirements that reports be

timely filed. The violations occurred. 73/

72/ No bookkeeping or recordkeeping viola-

tions are alleged.

73/ Hence Steadman willfully aided and

abetted the funds' failure to file

timely in violation of Section 30(a)

of the Investment Company Act and

(Continued)

« @2 «

Respondents' arguments seek to mitigate.

But we find them unavailing.

Differing with respondents as to the cause

of the delayed filings, the administrative

law judge attributed them to Steadman's

greater interest in expansion than attention

to proper management of existing funds. 74/

(73 Continued)

Rules 30a-1 and 30a-2 thereunder.

Moreover, the broker-dealers, will-

fully aided and abetted by Steadman,

willfully violated Section 17(a) of

the Exchange Act and Rule 17a-5 there-

under.

He commented that "even when the need

e

became painfully apparent, Steadman

refused to expand SSC's managerial

capability to manage properly the

newly acquired Funds and the broker-

dealers because the profitability of

such acquisitions was predicated upon

SSC's ability to manage the new Funds

with little or no increase in SSC's

personnel or other facilities."

= 62 o

He cited repeated advice given Steadman by

his auditors that proper accounting functions

were not being performed. 75/

And he cited a bank's termination of credit

to Republic resulting from Republic's

accounting problems.

SSC's personnel costs fell sharply in 1970.

This suggests that Steadman was more concerned

75/

It was these auditors who were replaced

during 1971. But before that time

they had advised Steadman that serious

deficiencies existed in SSC's organiza-

tion and capability to meet the increased

responsibilities resulting from the

expansion of the Steadman organization

in 1967 and 1968. They pointed out

that because of poor organization and

inadequate personnel, daily accounting

functions were not being performed,

records were not being maintained,

errors were going undetected, and

report deadlines were being met with

difficulty. They emphasized that this

was a serious situation which might in

the future require notice to regulatory

agencies.

- 83 -

with keeping costs down than with maintaining the

kind of an organization that was needed to do the

job. Steadman chose to save money on essentials.

The difficulties that this decision caused were

self-created. So we do not see how those diffi-

culties can possibly be deemed mitigative.

To file investment company annual reports more

than a year after they were due is to flout

basic regulatory requirements. Steadman's

cavalier treatment of his reporting obligations

frustrated the statutory design. We stressed

the importance of these reports back in 1965

when we materially revised the form on which

they are made. At that time we said:

"(T]he data in both reports [an

expanded public portion and a

non-public section] will materi-

ally assist the Commission in

its inspection program and will

enable its inspectors to do their

job more efrectively and ina

shorter time. In addition, the

reports will serve the added

purpose of laying before persons

responsible for the management

and operations of investment

companies information which will

~ $4 «

assist them to determine more

readily whether the statutory

standards and requirements are,

in fact, being complied with, and

thus in a measure achieve a sub-

stantial degree of self-inspec-

tion." 76/

Investment Company Act Release No. 4151

(January 25, 1965), p. 2. See The

Scholarship Club, Inc., 43 S.E.C. 917, 927

(1968), where we denied an exemption from

another of the reporting requirements of

Section 30 of the Investment Company Act

because "Congress balanced the need for

curing the evils resulting from the failure

to give investors full information against

the expense involved in reporting, and

resolved the question in favor of requiring

semi-annual reports." These same considera-

tions apply here in the case of annual

reports to the Commission. See also

Prudential Insurance Company of America,

41 S.E.C. 335, 356 (1963), affirmed sub

nom. Prudential Insurance Company of America

v. B.8.6., 326 F¥.26 363 (C.a. 9, I963),

certiorari denied, 377 U.S. 953.

2 «

The matter would be serious enough if we were

dealing only with the respondents! failure to

file their own reports. But there is much more

to it than that. Many of the reports involved

were due not from them but from their investment

company clients. They were under fiduciary and

contractual duties to those clients to file the

reports on time. Hence the admitted late filings

cannot be shrugged off as mere clerical slip-ups.

Their egregious lateness has grave public interest

implications.

VII. INTERCOMPANY TRANSACTIONS

During 1969 and 1970, Steadman Ameri-Fund,

a foreign, unregistered investment company 77/

whose investment adviser was SSC, bought

and sold securities directly from several

registered investment companies for which

77/ Steadman Ameri-Fund was a closed-end

investment company formed under the

law of the Netherlands Antilles. It

grew out of an alliance between Steadman

and five European banks. Those banks

owned all of Ameri-Fund's stock.

« @6 «

SSC also served as investment adviser. 78/

Respondents assert that the administrative

law judge erred in finding that those

transactions violated Section 17(a) of the

Investment Company Act.

Section 17(a) prohibits, absent an exemption,

purchases of securities from or sales to a regis-

tered investment company by an affiliated person

of such investment company, or by an affiliated

person of such affiliated person. The question

is whether Ameri-Fund was an affiliate of an

affiliate of the registered funds.

Section 2(a)(3)(C) of the Act defines "an

affiliated person" of another person to

include "any person directly or indirectly

78/ Ameri-Fund, which had no officers, was

managed by an entity called Steadman

International Capital Corporation ("Inter-

cap"). Half of Intercap's shares were

owned by SSC. The European banks owned the

other half. Steadman was Intercap's presi-

dent. More important, Intercap delegated

the management of Ameri-Fund's portfolio to

SSC. The governing documents gave SSC sole

investment discretion.

~ 67 «=

controlling, controlled by, or under common

control with, such other person." Moreover,

an investment company's investment adviser

is always an affiliated person of the

advisee. 79/ Thus SSC, as adviser to both

Ameri-Fund and the registered funds, was an

affiliated person of each of them. But

Ameri-Fund was not an affiliated person of

the registered funds with which it dealt.

However, if Ameri-Fund were directly or

indirectly controlled by an affiliated person

of the registered funds, viz. SSC, Ameri-Fund

would have been an affiliated person of an

affiliated person of the registered funds.

Respondents contend that SSC did not control

Ameri-Fund. 80/ But Ameri-Fund was simply

a portfolio of securities. To control that

portfolio (and SSC had sole investment

discretion with respect to it) was to

79/ Section 2(a)(3)(E).

80/ Section 2(a)(9) of the Act defines

"control" as “the power to exercise a

controlling influence over the manage-

icies of a company, unless

such power is solely the result of an

official position with such company."

» @8 «

control Ameri-Fund. 81/ Hence SSC controlled

Ameri-Fund. That made Ameri-Fund an affili-

ated person of an affiliated person of the

81/ Respondents' contentions to the contrary

rest in large measure on the patently pre-

dominant position of the European banks

that owned all of Ameri-Fund's stock. That

they had ultimate control is plain. When

dissatisfied with Steadman, they ousted him.

But that did not happen until after the

close of the relevant period. During that

period Steadman was running Ameri-Fund. So

he had the power to exercise a controlling

influence over the management or policies

that Section 2(a)(9) equates with "control."

Respondents point out that when a person's

controlling influence "is solely [emphasis

added] the result of an official position

with such company" (Section 2(a)(9)), he

is not deemed to control it. This does not

aid them. That exclusion applies to

officers and directors because officerships

and directorships are official positions.

An investment adviser, on the other

hand, holds no “official position" by

(Continued)

7

= 69 «

registered companies. It follows that

Section 17(a) prohibited the swapping of

(81 Continued)

virtue of his advisership. He is an

independent contractor. Moreover, the

term "investment adviser" is to some

extent a misnomer. It is a time-honored

misnomer enshrined in the Act which

borrowed its vocabulary from that of

the pre-1940 investment company industry.

The so-called "adviser" is no mere

consultant. He is the fund's manager.

See page 46 of our 1966 report on the

Public Policy Implications of Investment

Company Growth. House Report No.

2337, 89th Cong., 2d Sess. Hence the

investment adviser almost always

controls the fund. Only in the very

rare case where the adviser's role is

simply that of advising others who may

or may not elect to be guided by his

advice (and there is no contention

that this was Ameri-Fund's situation)

can the adviser realistically be

deemed not in control.

(Continued)

» 90 «

securities between Ameri-Fund and the

registered domestic companies. 82/

(81 Continued)

Hence we find no substance to the respon-

dents' argument that no adverse finding

can be made because of the sentence in

Section 2(a)(9), which reads: “Any person

who does not ... own more than 25 per

centum of the voting securities of any

company shall be presumed not to control

such company." That presumption is rebut-

table. And an investment advisership is

normally enough in itself to rebut it. The

adviser's controlling influence over his

advisee does not stem from stock ownership.

It stems from the fact that he manages the

fund's affairs and that his is normally the

only audible voice in day-to-day management.

Respondents have moved that all allega-

tions regarding transactions with

Ameri-Fund be dismissed because we

earlier accepted offers of settlement

from that fund and from Intercap.

(Continued)

« 91 «

We are therefore constrained to find that SSC

and Steadman willfully aided and abetted

82 Continued/

Thus, they argue, we prejudged the issues

with respect to them. This contention is

without merit. The order accepting the

offers of settlement expressly stated that

"(t]he findings herein are not binding

upon any other respondent named in the

proceedings." Investment Company Act

Release No. 7378 (September 22, 1972).

And our press release also stated that our

findings were based on offers of settlement.

No prejudgment occurs when prior findings

against another respondent are based on

that respondent's offer of settlement.

See Atlantic Equities Company, 43 S.E.C.

354, 366 (1967), aff'd sub nom. Hansen v.

s§.E.C., 396 F.2€ 694 (C€.A.D.C.), cazt. Gan.,

393 U.S. 847 (1968). Moreover, the Adminis-

trative Procedure Act exempts the members

of the Commission from the separation of

functions requirement applicable to our

staff.

(Continued)

» €2 «

violations of that section in each of the

twelve instances in which they caused the

domestic companies to buy securities from or

sell them to Ameri-Fund. 83/

Had Ameri-Fund been registered under the Act,

these transactions would have been perfectly

lawful. That is so because of our Rule 17a-7

under Section 17(a), which exempts most intra-

complex swaps from the sweep of the statutory

prohibition. Rule 17a-7 was adopted "to serve

the interests of investors by permitting

(82 Continued)

5 U.S.C. §5554. This permits us to consider

a matter in our administrative capacity and

thereafter render a decision with respect

to it in our quasi-judicial capacity. See

Attorney General's Manual on the Administra-

tive Procedure Act (1947), p. 58. Finally,

as stated above, our decision here is based

solely on the record now before us.

As noted earlier, Steadman was chairman of

SSC's board of directors and owner of all

its voting stock. So SSC's decisions were

Steadman's decisions.

» 93 =

affiliated registered investment companies,

which previously may have purchased or sold

securities on the open market in order to avoid

the application procedures of Section 17(b) and

thereby incurred duplicate brokerage charges,

to effect such transactions with each other and

pay no charges." 84/ Since Ameri-Fund was not

registered, these transactions required an

exemptive order from us. We do not condone the

failure to seek such order 85/ or

84/

33 S.E.C. Ann. Rep. 117 (1967).

That failure is said to have been based on

the advice of counsel. But no showing has

been made that counsel were ever asked to

opine on this point. They were consulted

about other legal problems presented by

the Ameri-Fund venture. Thus, for example,

they advised Steadman that Ameri-Fund did

not have to register under either the

Investment Company Act or the Securities

Act. That advice appears to have been

correct. But it had no bearing on

Section 17's reach.

e $4 @

orders. 86/ But realism requires us to

take account of the following factors:

(1) The rationale of Rule 17a-7 applies to

these transactions. Each of them could

have been effected with perfect legality in

the open market through a broker. Had that

been done, the net effect on investors

would have been the same as it was. But

substantial brokerage commissions would

have been expended.

(2) No showing has been made that any of

the companies involved was harmed.

These violations were somewhat technical.

Hence they are of little weight in assessing

sanctions.

86/ We think that such applications would

have been granted. And we do not

believe that a succession of applica-

tions would have been needed. Steadman

could have sought an order exempting

the entire class of transactions.

Such orders are frequent under the

Investment Company Act.

A.

- 95 -

VIII. THE PUBLIC INTEREST

Introduction

The administrative law judge described the

case as "novel and complex." That is true

of many areas. But those are peripheral.

The central areas are deceit and reckless

disregard of applicable filing requirements.

Both have long been known. 87/ Both are

87/

Respondents make much of the fact that no

previous litigated case to come before us

involved collateral banking relationships

of this type. (We have had other cases in

that general area. But all of them were

settled.) That does not seem especially

Significant. All that is involved here is

the duty to tell the truth. That the parti-

cular context in which that duty was breached

was never dealt with in an earlier case is

of little, if any, moment. Suppose, for

example, that another case about investment

company banks accounts comes up next year.

Suppose that, in that one, the investment

(Continued)

- 96 -

Simple. And both are extremely serious. We

agree with the administrative law judge that

"Strong sanctions are required to protect the

public interest." 88/

(87 Continued)

adviser simply wrote himself a check for

all the money in the investment company's

bank account. Would he be heard to argue

that a remedial proceeding based on his

failure to make appropriate disclosures is

a juridical novelty and that this absence

of relevant precedent requires that sanc-

tions be softened or withheld altogether?

This seems as good a place as any to deal

with the respondents' vitriolic attacks on

the administrative judge. Those seem

baseless to us. They say, for example,

that his “opinion ... is but a duplicate

of the briefs submitted by the Division of

Enforcement." But the administrative

judge found against the Division on a

number of points. True, he happened to

agree with the Division on the basic

things. That, however, scarcely brands

(Continued)

mam HE a

« $F «@

They are needed for two reasons. The first is

that our governing statutes are drawn on

(88 Continued)

him an unfit judicial officer. Though our

views diverge from those of the administra-

tive judge at a number of points, we find

his conduct of the case unexceptionable.

Nor can we agree that the administrative

judge applied an erroneous standard of proof.

He guided himself by the "preponderance of

the evidence" standard. Respondents say

that the "clear and convincing" standard

controls. We think that the administrative

law judge was right. Hence we reaffirm our

prior holdings that in remedial proceedings

of this character a preponderance of the

evidence is sufficient to establish the

truth of an allegation. Norman Pollisky,

43 S.E.C. 458, 459-460 (1967); Underhill

Securities Corporation, 42 S.E.C. 689, 695

(1965); White and Weld, 3 S.E.C. 466,

539-540 (1938). These are not criminal

proceedings. Even if we were seeking to

(Continued)

» $6 «

the premise that past misconduct gives rise to

an inference of probable future misconduct.

When the misconduct is as egregious as it is in

this case, we must take effective measures to

protect investors and the public interest from

future harm at the wrongdoers' hands.

The second factor that leads us to agree with

the administrative law judge's assessment of

the quantum of remedial action that the public

interest demands is the impact that the decision

is likely to have on the welfare of investors

as a Class and on the ethical climate of the

walks of life that we regulate. Leniency in a

case of this character is bound to encourage

irresponsibility, cavalier attitudes toward

basic disclosure

(88 Continued)

discipline a lawyer, the preponderance of

the evidence standard would govern.

Coariton ¥. F.7T.C., 5343 F.24 903 (C.A.0.C.,

1976). In any event, this burden of proof

controversy is now pointless. Our opinion

is based on the undisputed facts and on

the inferences that we have drawn from

them.

» 98 «

obligations, and disregard for inconvenient fil-

ing requirements. That cannot be done. As the

Court of Appeals for the Second Circuit recently

noted: "The purpose of sanctions must be to

demonstrate not only to petitioner but to others

that the Commission will deal harshly with

egregious cases." 89/

B. Steadman's Case

So egregiously faithless a fiduciary as

Steadman 90/ cannot be permitted to meddle

89/ Lipper v. S.E.C., 547 F.2d 171 (C.A. 2,

1976).

90/ Our conclusion that Steadman has shown him-

self a faithless fiduciary is based not on

the banking relationships themselves (see

n. 25, supra), but on:

(1) Steadman's intentional and protracted

concealment of those relationships from the

funds' actual and prospective shareholders,

from the funds' independent directors, and

from this Commission; (compare Santa Fe

Industries, Inc. v. Green, U.S. ’

97 S.Ct. 1292, 1299 (1977)); and

(Continued)

- 100 =

(90 Continued)

(2) His causing his corporate instrumen-

talities to commit flagrant and intentional

breaches of their contractual and fiduciary

duties to see to it that the funds complied

strictly with their reporting obligations to

us--obligations that Steadman's instrumentali-

ties had undertaken to perform for the funds

and which, as Steadman well knew, the funds

were wholly incapable of performing for

themselves.

The boundaries of the fiduciary concept are

necessarily hazy. Much often depends on the

particular factual setting and on the precise

questions presented. But some things are

axiomatic. It seems to us that among those

axioms is the proposition that federal

statutes of general application are at least

as binding on fiduciaries as they are on

other people. It follows that when a fidu-

Ciary breaks laws enacted for the benefit of

his cestuis que trust, he breaches his

fiduciary duties to them. And that is

exactly what Steadman did. Accordingly,

(Continued)

- 101 =

further with other people's money. 91/

Hence we agree with the administrative

(90 Continued)

we think it much too clear for argument

that he engaged in acts and practices

"constituting a breach of fiduciary

duty involving personal misconduct in

respect of [a] registered investment

company" within the meaning of that

phrase as used in Section 36(a) of the

Investment Company Act.

We would reach the same conclusion if the

Investment Company Act said nothing about

"a breach of fiduciary duty involving

personal misconduct." In fact, however,

Section 36(a) of the Investment Company

Act not only stigmatizes such breaches,

but authorizes the courts to enjoin

persons who have committed them or who are

about to commit them from further associa-

tion with registered investment companies.

Now it is quite true that, as Carl L.

Shipley, Securities Exchange Act Release

No. 10870, Investment Company Act Release

(Continued)

ewan S&S & & EE

- 102 -

law judge that Steadman must be excluded from

both the investment company business and the

(91 Continued)

No. 8394, Investment Advisers Act Release

No. 419 (June 29, 1974), 4 SEC Docket 476,

478, pointed out, Section 36 "simply autho-

rizes the Commission to file an action in

the Federal court and empowers the court to

grant appropriate relief." Hence Shipley

held that "Section 36 cannot serve as the

sole [emphasis added] basis for administra-

tive sanctions."

But Shipley also explained that:

"Our conclusion that we cannot

conduct an administrative dis-

ciplinary proceeding based

solely upon an alleged viola-

tion of Section 36 does not

mean that we have no authority

to take cognizance of that

section in a proceeding other-

wise appropriately before us.

[And this is such a

(Continued)

eo i Ga fF

- 103 =

investment advisory profession generally. Like

the one from which the respondents appealed,

our order will:

(91 Continued)

proceeding.] Section 36(a)

has been held to be more than

a mere grant to the federal

courts of jurisdiction to apply

common law principles. It is

also a means of enforcing the

Investment Company Act. [At

this point a footnote (n. 15

reprinted at p. 480 of 4 SEC

Docket) cited and quoted from

Brown v. Bullock, 194 F. Supp.

207, 238 (8.D.N.¥.; 1961),

affirmed on other grounds, 294

P.2d@ 415:(C.A. 2, 1961). ]}

Consequently, ... in an admin-

istrative proceeding where we

had found willful violations

of some other provisions of

the Act, we could, on the

issue of what sanction was

appropriate, consider and

(Continued)

- 104 -

(A) Permanently prohibit Steadman from

associating himself with any registered

(91 Continued)

determine whether or not the

respondent had committed a

breach of trust involving

personal misconduct within

the meaning of Section 36."

For reasons developed in the foregoing

extract from our Shipley opinion, we

have the power, and indeed the duty, to

take the status of Steadman's conduct

under Section 36 of the Investment Com-

pany Act into account when we assess the

sanction here. Steadman suggests that

this is unfair to him because the order

for proceedings gave him no notice that

fiduciary duty would be an element in the

case. The claim is frivolous. Section

36 has no substantive significance here.

It goes only to the question of sanction.

And on that question the range of per-

tinent considerations is almost infinite.

(Continued)

- 105 =

investment company or any investment adviser

to, depositor of, or principal underwriter

(91 Continued)

See International Shareholders Services

Corporation, Securities Exchange Act

Release No. 12389A (June 8, 1976), 9 SEC

Docket 821, 825-826 n. 19: “Assessing

the nature of the remedial action that

the public interest calls for under the

concrete circumstances of a particular

case is a serious and an onerous task.

Many factors (some of them more easily

felt than articulated) are worthy of

consideration .... The range of

inquiry is broad."

Even in a criminal case, which this is

not, a defendant would be altogether

unable to make anything out of the fact

that the indictment failed to give him

notice of each and every circumstance

that the court might possibly take into

account on sentencing.

Though these proceedings are not

criminal, they are intensely serious.

(Continued)

= a lUG CU

¢

j

So Ge Ge = Gy

- 106 -

for any such company in any of the capacities

specified in Section 9(b) of the Investment

Company Act; 92/

(91 Continued)

And we take them very seriously indeed.

But since counsel have had opportunity to

argue the sanction questions and have in

fact argued them at great length, we see no

unfairness here.

92/ Section 9(b) reads in pertinent part:

"The Commission may ...

prohibit, conditionally or

unconditionally, either

permanently or for such

period of time as it in its

discretion shall deem appro-

priate in the public interest,

any person from serving or

acting as an employee,

officer, director, member

of an adisory board, invest-

ment adviser or depositor

(Continued)

- 107 -

(B) Bar him from association with any

(92 Continued)

of, or principal underwriter

for, a registered investment

company or aifiliated person

of such investment adviser,

depositor or principal under-

writer if such person--

(2) has willfully violated

any provision of the Securi-

ties Act of 1933, or of the

Securities Exchange Act of

1934, or of title II of this

Act [the Investment Advisers

Act], or of this title, or

of any rule or regulation

under any of such statutes."

Section 9(b)(3) confers a like power on us

with respect to any person who "has willfully

aided, abetted, counseled, commanded, induced

or procured the violation by any other person

of the Securities Act of 1933, or of the

Securities Exchange Act of 1934, or of title

II of this Act, or of this title, or of any

rule or regulation under any of such statutes."

@e om an ou

- 108 =

investment adviser; 93/ and

(C) Suspend him for one year from association

with any broker or dealer.

93/ Steadman questions our power to do this.

He raises a comparable question about the

reach of Section 9(b) of the Investment

Company Act, quoted in the preceding foot-

note. The two arguments rest on a single

foundation. Hence we treat them together.

Steadman correctly points out that before

the Investment Company Amendments Act of

1970 (84 Stat. 1413, et seq.) neither the

Investment Company Act nor the Investment

Advisers Act empowered us to take the

action that we now propose to take with

respect to him under the post-1970 versions

of those statutes. The pre-1970 version

of the Investment Company Act made no pro-

vision at all for administrative remedies.

Our 1966 Public Policy report noted (at

pp. 338-340) that this was an anomaly and

urged a curative amendment along the lines

of present Section 9(b).

(Continued)

ae Gm

- 109 -

The administrative law judge explained that he

was Jmposing "less severe sanctions

93 Continued/

The Investment Advisers Act presented a

somewhat similar situation. Though that

statute authorized administrative proceed-

ings ever since it was first enacted in

1940, those proceedings prior to 1970

related to firms rather than to people.

We had no administrative power to bar

anyone from association with an investment

adviser. Nor could we suspend or limit

such associations. That was a significant

shortcoming. Congress rectified it. It

did so by amending the Advisers Act. (The

Investment Company and Investment Advisers

Acts are intimately related. Indeed, the

two were enacted together as Title I and

Title II of the same bill. 54 Stat. 789

(1940). So the Congress addressed itself

to both statutes in the Amendments Act of

1970.) The pertinent change in the Advisers

Act was the addition of present Section

203(f). 84 Stat.

(Continued)

- 110 =

against Steadman under the Exchange Act than

the maximum sanctions imposed upon him

93 Continued/

1432. That empowered us to proceed against

persons under the Advisers Act just as we

had been doing under the Exchange Act ever

Since 1964 when the Securities Amendments

Act of that year revised Section 15(b) of

the 1934 statute.

The amendments that we have just described

became effective on December 14, 1970.

Steadman reasons that this means that no

sanctions can be imposed under either

Section 9(b) of the Investment Company Act

or Section 203(f) of the Investment Advisers

Act for anything that happened before

December 14, 1970. For the moment we

assume, arguendo, that he is right about

that. The result is unaffected. The

order that initiated these proceedings

issued on June 23, 1971, more than six

months after the effective date of the

1970 amendments. And much of the alleged

(Continued)

- lll -

under the I.C.A. and the Advisers Acts because

the violations under the last two

93 Continued/

misconduct occurred after the amendments

had become law. Thus, for example, the

failures to file reports when due relate

to the years 1971 and 1972. With respect

to those, Steadman gains nothing from his-

torical references to the pre-December 14,

1970 deficiencies in our catalogue of

remedies. Nor do those references aid him

on the fraud issues, the very heart of the

case. His concealments were continuing

wrongs. They did not stop on December 14,

1970. They went on far beyond that date.

Moreover, Steadman's premise is erroneous.

He relies on the constitutional ban on ex

post: facto iews. U.S. CONST. art. I, $ 9,

ci. 3: “Ho ... @&. post facte iav shall be

passed." But this clause applies only to

retroactive penal legislation. Calder v.

Bull, 3 Dall.

(Continued)

- 112 =

Acts are deemed more significant in terms of

the need for long-range protection of the

public interest." But the heart of this case

is deception. And that deception was calculated

and protracted. Such a propensity to deceive

is as unsuitable in a broker or dealer as it is

in an investment

93 Continued/

386 (1798). Hence, it interposes no bar

to the retrospective application of tests

of fitness in licensing statutes. Hawker

v. New York, 170 U.S. 189 (1898). Moreover,

Sections 9(b) and 203(f) effected no

substantive changes. They had no effect

on the substantive legality of the conduct

here involved. The concealments were made

illegal back in 1933. And the filing

duties involved date back to the early

years of the Exchange and Investment

Company Acts. The changes that went into

effect on December 14, 1970, went solely

to matters of remedy and had no bearing on

legal rights or legal duties.

ae ee ae oe oe oe oe oe oe oe oe oe ee

- 113 -

adviser or in an investment company manager. 94/

When shall the sanctions take effect? Where we

have found the misconduct serious enough to

warrant a bar, the bar order normally becomes

effective on issuance. 95/ That seems inappro-

priate here.

Steadman is the active operating head of the

management organization. To oust him

94/ Cf. Thomas E. Jackson, Securities Exchange

Act Release No. 11476 (June 16, 1975), 7

SEC Docket 193, 194: "Although Jackson's

wrongdoing in this instance did not involve

securities, the NASD could justifiably

conclude that on another occasion it

might."

But when barred or revoked respondents

R

appeal or indicate that they intend to

appeal to the Court of Appeals, we give

stays of sufficient duration to enable

them to seek further stays from the courts.

See Nassar & Company, Inc., Securities

Exchange Act Release No. 13081 (December 17,

1976), 11 SEC Docket 1221, 1222; Arleen W.

Hughes, 27 S.E.C. 952, 956 (1948).

- 114 -

at once might leave the funds in difficult

straits, albeit temporarily. We think it better

to permit him to remain on board for 90 days.

That should give the funds' directors adequate

opportunity to make appropriate arrangements for

their beneficiaries' post-Steadman future.

Another factor that leads us to deem a 90-day

stay appropriate is our wish to be fair to

Steadman himself. His SSC stock may well be of

substantial economic value. We see no need to

divest him of that value. The 90-day transitional

period gives him abundant time to find a buyer.

C. The Corporate Respondents

Stating that he saw no reason to visit Steadman's

Sins and those of SSC on their co-respondents,

the administrative law judge tried to assess

the precise culpability of each corporate

respondent. He first found SSC guilty of grave

wrongdoing. He then predicated his conclusions

with respect to the four SSC subsidiaries

before him on "the number, nature and gravity

of violations committed by each particular

respondent." Normally, we should commend that

course. Every effort should be made in proceed-

ings of this character to steer clear of even a

hint of guilt by association.

- 115 -

But such efforts must be tempered by realism.

The corporate respondents in this case are all

Steadman's instrumentalities. That one of them

happened to transgress more than another was

mere accident. It suited Steadman to do things

that way.

The administrative law judge thought that SSC

should be put out of business. Were we to

agree with him about that, we should conclude

that SSC's wholly owned subsidiaries deserve

the same fate. But we see no pressing need for

any sanctions at all on either SSC or its

children.

It is the real parent, not SSC but Steadman

himself, at whom the remedy must be aimed. His

corporate children can safely be left alive for

adoption by others, just as Steadman himself in

days gone by acquired advisory and broker-dealer

entities from people unaffiliated with him.

Were this the usual one-man corporation case,

the result would be different. There no one

has any real interest in the corporation other

than its sole controlling person. Hence sanc-

tions on him are normally coupled with correla-

tive sanctions on his corporate alter ego.

- 116 =-

Two factors appear to make this approach inappro-

priate here. One is SSC's nature and function.

The SSC organization manages what is still a

fairly substantial investment company complex.

Were that organization to be liberated from

Steadman's influence and were control over it

to pass to clean hands, the continued existence

of the SSC organization would be perfectly

compatible with the public interest. 96/

96/ Compare Arthur Lipper Corporation, Securities

Exchange Act Release No. 11773 (October

24, 1975), 8 SEC Docket 273, 281 (1975),

modified on an appeal by other respondents

sub nom. Lipper v. S.E.C., 547 F.2d 171

(C.A. 2, 1976): “IPC's case differs

materially from IOS's. IPC was a mere

instrumentality. It was never an indepen-

dent actor. Moreover, its present owners

are wholly unaffiliated with IOS. It

follows that a sanction against IPC could

not possibly tend to achieve any remedial

purpose. We therefore find it in the

public interest to discontinue the proceed-

ings, so far as they relate to IPC."

- 117 -

Secondly, we cannot ignore SSC's non-voting

shareholders. 97/ To revoke the corporate

respondents' registrations with us would be to

strip them of the going concern value (actual

and potential) of their interest. There is no

compelling public interest reason to do that.

Finally, the imposition of sanctions on the

corporate respondents at this time would be

inconsistent with our decision to give Steadman

a reasonable time within which to dispose of

his SSC stock, if he can. Were we to put SSC

out of business now, Steadman would be left

with nothing to sell.

If Steadman had already sold out to a responsible

and competent successor, we should dismiss here

and now as against all of the corporate respon-

dents. 98/ But

97/ Some of them may be public investors.

98/ We should also grant the applications of

three of them (Steadman Investment Services

Corporation, Aberdeen Management Corporation,

and Republic Securities Corporation) for the

withdrawal of their registrations as brokers

(Continued)

- 118 -

there is no assurance that such a successor

Will appear. So dismissal at this time would

be patently premature.

Having given Steadman 90 days to find a buyer,

we now give SSC that same 90 days to liberate

itself from his influence. If an adequate

showing is made within those 90 days that all

links between SSC and Steadman have in fact

been severed and that SSC is in new and responsi-

ble hands, we shall dismiss as to it and its

subsidiaries. SSC's failure to make such a

showing will necessitate a reassessment of the

Situation at the end of the 90-day period.

Hence the order we enter this day will reserve

jurisdiction over the corporate respondents.

98 Continued/

and dealers. In view of the position

taken in the text and in the Lipper case

cited supra, we should be constrained to

find that the tests set forth in our Rule

15b6-1(b) under the Exchange Act had been

satisfied.

- 119 =

IX. CONCLUSION 99/

Our order will:

(A) Bar Steadman from association with any

investment adviser;

(B) Prohibit him permanently 100/ from

serving or acting as an employee, officer,

99/ Some of the many contentions made have not

been treated explicitly. This does not mean

that we have ignored them. All points pre-

sented have been carefully considered.

100/ The word "permanently" is taken from

Section 9(b) of the Investment Company

Act. However, we always retain control

over our own orders. Inherent in the

power to issue orders of this type is

the power to modify them. Hence

"permanently" in this context really

means “indefinitely.” The bar from

association with any investment adviser

is also of indefinite duration. See

Applications for Reiief from Disqualifi-

cation, Securities Exchange Act Release

(Continued)

- 120 -

director, member of an advisory board, investment

adviser or depositor of, or principal underwriter

for, a registered investment company or affili-

ated person of such investment adviser, depositor,

or principal underwriter;

(C); Suspend him for one year from association

with any broker or dealer;

(D) Stay the effective date of the aforemen-

tioned sanctions for 90 days from the date

hereof, thus:

100 Continued/

No. 11267, Investment Company Act Release

No. 8689, Investment Advisers Act Release

No. 438 (February 26, 1975), 6 SEC Docket

346. Judicial notice has been taken of

our discretionary power to lift or modify

disqualifications. The authorities are

collected in John R. Brick, Securities

Exchange Act Release No. 11763, Investment

Advisers Act Release No. 483 (October 24,

1975), 8 SEC Docket 240, 247-248 n. 38,

where we stated that "so-called lifetime

bars are actually bars of indefinite

duration."

- 121 =

(i) facilitating an orderly transition

to new management wholly divorced from

Steadman's influence; and

(ii) giving Steadman himself an

adequate opportunity to dispose of his SSC

stock;

(E) Require SSC to file a report with us about

what, if anything, has been done to sever

Steadman's links to it; 101/

(F) Reserve jurisdiction to enter such other,

further, and different orders with respect to

the corporate respondents as we in our discretion

may hereafter deem appropriate in the public

interest and for the protection of investors in

light of the contents of the aforementioned

report--or

101/ This report shall be filed within 90 days

from the date hereof and shall be accompanied

by proof of service on our Division of

Enforcement and on our Washington Regional

Office.

- 122 -

if no such report should be filed, in light

of the failure to file it. 102/

By the Commission (Chairman WILLIAMS and

Commissioners LOOMIS and EVANS); Commissioner

POLLACK not participating.

George A. Fitzsimmons

Secretary

102/ Respondents' objections to the initial

decision are overruled or sustained to

the extent that they are inconsistent

or in accord with the views expressed

in this opinion.

ans os ou ms mi

- 123 -

UNITED STATES OF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Rel. No. 13695 / June 29, 1977

INVESTMENT ADVISERS ACT OF 1940

Rel. No. 593 / June 29, 1977

INVESTMENT COMPANY ACT OF 1940

Rel. No. 9830 / June 29, 1977

Admin. Proc. File No. 33-3101

In the Matter of

STEADMAN SECURITY CORPORATION

1730 K Street, N.W.

Washington, D. C.

(801-8141)

CHARLES W. STEADMAN

REPUBLIC SECURITIES CORPORATION

(8-13223)

STEADMAN INVESTMENT SERVICES CORPORATION:

(8-14704 and 801-5679) :

THE STEADMAN CORPORATION OF AMERICA

(8-13955)

ABERDEEN MANAGEMENT CORPORATION

(8-1867 )

ORDER IMPOSING REMEDIAL SANCTIONS

On the basis of the Commission's opinion

issued this day, it is

- 124 -

ORDERED that Charles W. Steadman be, and he

hereby is,

(1) Barred from association with any investment

adviser;

(2) Permanently prohibited from serving or

acting as an employee, officer, director,

member of an advisory board, investment adviser

or depositor of, or principal underwriter for,

a registered investment company or affiliated

person of such investment adviser, depositor,

Or principal underwriter; and

(3) Suspended for one year from association

with any broker or dealer; and it is further

ORDERED that the above sanctions shall become

effective at the opening of business on October

3, 1977; and it is further

ORDERED that Steadman Security Corporation be,

and it hereby is, directed to file twelve

copies of a report with the Secretary of the

Commission (to be accompanied by proof of

service on the Commission's Division of Enforce-

ment and on its Washington Regional Office)

setting forth in detail the steps, if any, that

have been taken to sever Steadman's links to

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it; and it is further ORDERED that Steadman

Security Corporation file the aforementioned

report on or before October 3, 1977; and it is

further

ORDERED that jurisdiction be, and it hereby is,

reserved with respect to all of the corporate

respondents herein to enter such other, further,

and different orders as the Commission may in

its discretion deem appropriate in the public

interest and for the protection of investors in

light of the contents of the aforementioned

report--or if no such report should be filed,

in light of the failure to file it.

By the Commission.

George A. Fitzsimmons

Secretary