1 On the assumption that the outstanding stocks as of the dates indicated in notes 2 to 8 below did not vary between such dates and June 30, 1966. All management company stock owned by FOF, with the exception of stock of Alleghany Corp., Insurance Securities, Inc., and the Dreyfus Corp., is nonvoting. 2 Alleghany Corp, is the controlling stockholder of Investors Diversified Services, Inc., investment adviser to and distributor of 4 registered mutual funds with combined assets in excess of $5,000,000,000, 2 face-amount certificate companies with combined assets in excess of $1,000,000,000 and a unit trust with about $5,700,000 in asset. As of Nov. 30, 1965. In addition there were 3,999,000 shares of class A voting shares and 537,500 shares of nonvoting class C outstanding. As of Dec., 31, 1965. As of June 30, 1965. 6 As of Dec. 31, 1965. In addition there were 32,514 shares of class B voting shares outstanding. 7 As of Dec. 31, 1965. In addition there were 33,000 shares of class B voting share outstanding. (Exhibit B) Administrative Proceeding File No. 3-497 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION February 3, 1966 IN THE MATTER OF I.O.S., LTD. (S.A.) D/B/A INVESTORS OVERSEAS SERVICES (8-8622); INVESTORS CONTINENTAL SERVICES, LTD. (8-6948); BERNARD CORNFELD, EDWARD M. COWETT, ALLEN R. CANTOR, W. THAD LOVETT, ROBERT NAGLER, HYMAN FELD (Securities Exchange Act of 1934) ORDER FOR PUBLIC PROCEEDINGS PURSUANT TO SECTIONS 15 (b) AND 15A OF THE SECURITIES EXCHANGE ACT OF 1934 I The Commission's public official files disclose and the Division of Trading and Markets alleges: A. I.O.S., Ltd (S.A.) d/b/a Investors Overseas Services (IOS), a Panama corporation, having its principal office at 119 rue de Lausanne, Geneva, Switzerland, became registered as a broker-dealer with the Commission pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) on June 10, 1960. B. Investors Continental Services, Ltd. (ICS), having its principal office at 7 West 57th Street, New York, New York, became registered as a broker-dealer with the Commission pursuant to Section 15 (b) of the Exchange Act on November 18, 1958 and is a member of the National Association of Securities Dealers, Inc. C. IOS is the beneficial owner of more than 10% of the equity securities of ICS. D. Bernard Cornfeld (Cornfeld) is the president, a director and beneficial owner of more than 10% of the equity securities of IOS and a director and indirect beneficial owner of more than 10% of the equity securities of ICS. E. Edward M. Cowett (Cowett) is a vice-president and a director of IOS and secretary and a director of ICS. F. Allen R. Cantor (Cantor) is senior vice-president of IOS. G. W. Thad Lovett (Lovett) is executive vice-president of IOS. H. Robert Nagler (Nagler) is a director of IOS. I. Hyman Feld (Feld) is president and a director of ICS and an assistantsecretary of IOS. J. Pursuant to Rule 17a-7 of the Exchange Act IOS filed on May 27, 1960 an undertaking signed by Cowett to furnish at its own expense to the Securities and Exchange Commission, at its principal office in Washington, D.C., “true, correct, current and complete copies of any part of the books and records which the undersigned is required to make, keep current or preserve pursuant to any provision of any rule or regulation of the Securities and Exchange Commission under the Exchange Act." K. The Fund of Funds, Ltd., a non-resident Canadian corporation with its principal office at 119 rue de Lausanne, Geneva, Switzerland, is engaged in investing principally in shares of investment companies registered under the Investment Company Act of 1940 (Investment Company Act). L. The IOS Investment Program for the accumulation of interests in The Fund of Funds, Ltd. is a front-end load installment payment plan, or a fully paid plan, sponsored by IOS, by means of which interests in The Fund of Funds, Ltd. are offered for sale and sold. M. No registration statement has been filed or is in effect with the Commission under the Securities Act of 1933 (Securities Act) with respect to the securities comprising interests in The Fund of Funds, Ltd. or with respect to the participations in the IOS Investment Programs. N. Neither The Fund of Funds, Ltd. nor the IOS Investment Program relating thereto has filed an application pursuant to Section 7(d) of the Investment Company Act and neither has registered with the Commission pursuant to Section 8 of the Investment Company Act. O. On May 28, 1965 Value Line Special Situations Fund, Inc. (Value Line) filed a prospectus in connection with post-effective amendment No. 22 to its registration statement pursuant to Sections 7 and 10 of the Securities Act and Rule 424 (c) thereunder. P. On May 20, 1965 Convertible Securities and Growth Stock Fund, Inc. (Convertible) filed a prospectus in connection with post-effective amendment No. 26 to its registration statement pursuant to Sections 7 and 10 of the Securities Act and Rule 424 (c) thereunder. Q. On September 20, 1965 Research Investing Corporation (RIC) filed posteffective amendment No. 15 to its registration statement pursuant to Sections 7 and 10 of the Securities Act. R. On October 19, 1965 American Investors Fund, Inc. (American) filed a proxy statement pursuant to Section 14 of the Exchange Act. S. Value Line, Convertible, RIC and American are investment companies registered pursuant to the provisions of the Investment Company Act. II. The staff has obtained information which tends to show and the Division of Trading and Markets alleges: A. VIOLATIONS OF SECTION 5 OF THE SECURITIES ACT AND VIOLATIONS OF SECTION 7 OF THE INVESTMENT COMPANY ACT 1. IOS is the underwriter and exclusive distributor of the IOS Investment Program for the accumulation of interests in The Fund of Funds, Ltd. (FOF) which includes interests in numerous other securities in the portfolio of FOF. In the offer and sale of the IOS Investment Program, IOS has used the United States mails and means and instrumentalities of interstate commerce. 2. No registration statement pursuant to Section 7 of the Securities Act with respect to interests in FOF or participations in the IOS Investment Program has been filed with the Commission and none has been declared effective. Accordingly, during the period from approximately September 1, 1962 to the present time, IOS, Cornfeld, Cowett, Cantor, Lovett and Nagler, singly and in concert, willfully violated Sections 5(a) and 5(c) of the Securities Act in that said persons, directly and indirectly, made use of the means and instruments of transportation and communication in interstate commerce and of the mails to offer to sell, sell and deliver after sale securities, namely the IOS Investment Program for the accumulation of interests in FOF, when no registration statement was in effect as to said securities under the Securities Act. 3. Neither FOF nor the IOS Investment Program relating thereto has filed an application pursuant to Section 7(d) of the Investment Company Act and neither has registered with the Commission pursuant to Section 8 of the Investment Company Act. Accordingly, during the period from approximately September 1, 1962 to the present time, IOS, Cornfeld, Covett, Cantor, Lovett and Nagler, singly and in concert, wilfully violated and wilfully aided and abetted violations of Section 7 (d) of the Investment Company Act in that said persons, directly and indirectly, made use of the means and instrumentalities of interstate commerce and of the mails to offer for sale, sell or deliver after sale in connection with a public offering of securities of investment companies (as defined in the Investment Company Act), namely FOF and the IOS Investment Program for the accumulation of interests in FOF, which companies are not and have not been organized or otherwise created under the laws of the United States or of a state. 4. Had such registration statements been filed and effective under the Securities Act and the Investment Company Act, full disclosure would have been required by the provisions of Sections 7 and 10 of the Securities Act and Sections 24 and 30 of the Investment Company Act, and the respective rules, regulations and forms thereunder, with respect to matters which have been inadequately and inaccurately disclosed as hereinafter stated; and such failure to register in that manner adversely affected the public interest and the interest of investors. a. Quarterly reports of FOF to investors, under the heading "Highlights," include a table which compares the net asset value per share performance of FOF over stated periods of time with the performance of the "Mutual Fund Industry average," "Standard & Poor's '500' Stock Index" and "Dow-Jones Industrial Stock Average." The table omits to disclose to investors that while the FOF net asset value per share reflects the reinvestment of all net dividend and interest income and realized capital gains, the Standard & Poor's "500" Stock Index and the Dow-Jones Industrial Stock Average do not include any element of reinvestment of income. The Mutual Fund Industry average, to which comparison is also made, is not identified and the FOF reports do not state whether or not this average reflects such reinvestment. Nor do the FOF reports disclose that registered investment companies, with rare exceptions, distribute such dividends, income and realized gains to their shareholders. Contrary to items (h) and (q) of the Commission's Statement of Policy (17 CFR 271.2621), the table (i) omits to disclose material differences between the subjects of the comparison and (ii) compares the performance of FOF with that of a Mutual Fund Industry average without disclosing whether the companies whose shares are held in the portfolio of FOF constitute a group of companies which generally approximates in composition and character the group of companies whose shares are included in the Mutual Fund Industry average to which comparison is made. b. The prospectus of FOF dated May 3, 1965, at page 5, the annual report of FOF to stockholders for the year ended December 31, 1964, at page 11, and the semi-annual report of FOF to stockholders for the six months ended June 30, 1965, at page 9, present charts which do not conform to item (j) of the Commission's Statement of Policy relating to the form and content of charts employed in the offer and sale of investment company securities. c. The prospectus of FOF dated May 3, 1965 contains a "Statement of Net Assets." Note 1 to the financial statements contained therein states that as of December 31, 1964 there were 7,841,688 Class A non-voting shares and 350 common shares of FOF outstanding. Said note and prospectus omit to disclose that all of said 350 shares (the only outstanding voting shares) are controlled by IOS. d. The prospectus of FOF dated April 1, 1964 and the prospectus of FOF dated May 3, 1965 each contain a section entitled "The Fund May Invest In" in which the various ways in which the assets of FOF may be invested are discussed. Neither prospectus discloses, however, that by reason of its control of all of the outstanding common (voting) stock of FOF, IOS may cause, and as set forth below has caused, the investment policy of FOF to be changed at will. (i) The prospectus of FOF dated April 1, 1964 states that the Fund may invest in (A) "Shares issued by any open-end investment company (mutual fund) registered with the United States Securities and Exchange Commission which primarily invests in U.S. securities. (The Securities and Exchange Commission is a permanent agency of the United States government which carefully regulates the securities industry in the U.S.) [Emphasis in original.] (B) "Securities issued by any publicly-owned corporation in the United States principally engaged in the management and/or distribution of open-end investment companies. 66 (C) -Obligations of the United States or Canadian governments, or cash and time deposit certificates issued by any bank or trust company having a net worth in excess of US $5,000,000. (Such investments are often intended for periods when unusal market conditions occur and Management considers that a defensive position is indicated. At such times, Management will emphasize conservation of principal and will maintain sufficient cash balances to permit the purchase of additional holdings at more favorable prices.)" (ii) Without stating that the investment policy had been changed since April 1, 1964, and without identifying or explaining the reasons and purposes for, and the effects of, the changes, the prospectus of FOF dated May 3, 1965 states the investment policy of FOF as follows: (A) "-Shares issued by any open-end or closed-end investment company registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940. (The Securities and Exchange Commission is a permanent agency of the United States government which regulates the securities industry in the U.S.) [Emphasis in original.] (B) "Securities issued by any company engaged in the management and/or distribution of such investment companies. (C) "Obligations of the United States or Canadian governments, or time deposit accounts in a recognized bank or trust company." (iii) The prospectus of FOF dated May 3, 1965 does not disclose (A) that the changes made in transforming paragraph (i)(A) into paragraph (ii) (A) above among other things (1) permit FOF to invest in securities issued by registered investment companies, but not registered under the Securities Act, with the consequence that during the period from April 30, 1965 to October 12, 1965, $10,000,000 of the assets of FOF were in fact invested in unregistered securities of The York Fund, Inc., a newly organized investment company controlled by IOS, which owns 45% of the York Management Company, Ltd., the investment adviser of The York Fund, Inc.; and (2) permit the assets of FOF to be invested in shares of registered investment companies which are primarily engaged in investing in non-United States securities. (B) that the changes made in transforming paragraph (i) (B) into paragraph (ii) (B) above permit the assets of FOF to be invested in securities of companies "engaged in the management and/or distribution of such companies" which are not publicly-owned, under circumstances where IOS controls and owns a substantial interest in such companies. (C) the changes made intransforming paragraph (i) (C) into paragraph (ii) (C) above (1) permit the assets of FOF to be held in time deposits as an integral, continuing, non-defensive element of its investment purposes; and (2) permit the assets of FOF to be invested in any bank or trust company, so long as it is a "recognized" (by whom, and upon what criteria, is unstated) bank or trust company, even though the "bank or trust company" has a net worth of less than $5,000,000 under circumstances where IOS wholly owns, controls, and directly or indirectly has interests in banks which under these terms will be eligible to receive time deposits from FOF. (iv) Since the prospectus of FOF dated May 3, 1965, the investment policy of FOF has been changed to permit it now to invest in securities issued by Canadian investment companies not registered with the Commission, under circumstances where IOS wholly owns I.O.S. of Canada, Ltd., which wholly owns Regent Advisers (1963) Ltd., a Canadian company which manages and underwrites Regent Fund, Ltd., a Canadian investment company which is not registered with the Commission. e. The prospectus of FOF, the prospectus for the IOS Investment Program for the accumulation of interests in FOF, and the periodic reports of FOF do not disclose the extent to which IOS dervies revenues from its operations relating to FOF. In particular: (i) The semi-annual report of FOF dated June 30, 1965 indicates, in a statement of net assets made a part thereof, that included in the assets of FOF as of that day was "cash, including interest-bearing deposit accounts of $38,400,000," in the total amount of $46,367,600. Note 6 of the financial statement states in relation thereto : "Interest-bearing deposit accounts may be maintained by or for the Fund in recognized banks or trust companies: Although I.O.S., Ltd. (S.A.), distributor of the Fund, directly or indirectly has interest in or controls eligible financial institutions, as of June 30, 1965, no deposits have been made in such institutions." Said Note 6 and said semi-annual report omit to disclose that as of the date or dates prior and subsequent to June 30, 1965 substantial amounts of cash of FOF were deposited with a financial institution which extends a line of credit to Investors Overseas Bank, Ltd., a wholly-owned subsidiary of IOS located in Nassau, the Bahamas, the business of which is lending money to investors, at 6% to 6% interest per annum, in order to finance their acquisition of IOS Investment Programs for the accumulation of interests in FOF. (ii) The semi-annual report of FOF dated June 30, 1965 indicates that FOF's portfolio included as of that date 501,743 shares of The York Fund, Inc., an investment company with total net assets of $4,491,500 as of that date. The cost of the FOF investment in The York Fund, Inc. is indicated as $5,050,000 and its "quoted market" value as of June 30, 1965 is indicated to be $4,500,600. The semi-annual report dated June 30, 1965 describes The York Fund, Inc. as follows: "The York Fund, Inc. Organized in April 1965 as a registered investment company under the U.S. Investment Company Act of 1940, Fund shares are currently available only to The Fund of Funds, the 'founderinvestor.' Its charter permits maximum flexibility in both rising and declining markets. Compensation of the management group is solely on a performance basis. It is hoped that York Fund, with its flexible approach will, over the long term, stay among the industry leaders." [Emphasis in original.] Said description omits to disclose : (A) The "founder-investor" of the fund is not FOF. While FOF is the sole "investor" in The York Fund, Inc., IOS rather than FOF is its "founder." IOS owns 45% of the outstanding stock of York Management Company, Ltd., located at 119 rue de Lausanne, Geneva, Switzerland. the management company of The York Fund, Inc. (B) Under its investment advisory and management services contract with The York Fund, Inc., York Management Company, Ltd. will receive investment advisory fees computed as the sum of "(a) 10% of the excess of realized and unrealized securities gains over realized and unrealized securities losses (reduced by the excess, if any, of such losses over such gains in the immediately preceding year), and "(b) 10% of the net interest, dividends and other income of the Registrant, less "(c) all amounts which the adviser is required to reimburse Registrant for operating expenses, salaries of officers and employees, directors' fees and office expenses." (C) The acquisition cost of the 501,743 shares of The York Fund, Inc. owned by FOF included a sales charge (1%), all or substantially all of which has been paid to IOS as the broker-dealer for the buyer (FOF). (iii) Interests in FOF are offered for sale by means of participations in the IOS Investment Program. The types of investment programs offered to investors under the IOS Investment Program include a "Capital Accumulation Program with Insurance Protection" (CAPINS). The prospectus of the IOS Investment Program dated March 1, 1965 described CAPINS as a plan by which investors are able "to assure completion of all unpaid insured Investment Units in the event of death." [Emphasis in original.] This is done by the 46-824-70-8 |