Gallery: The Bright Image: The SEC, 1961-1973

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The Bright Image: The SEC, 1961-1973

An Economic Theory of Regulation Emerges

The Penn Central Collapse

Corporate practices converged to cause new challenges for the SEC in regulating takeovers. While the Securities Exchange Act of 1934 broadly mandated SEC jurisdiction in a wide variety of areas, that mandate was weak in areas of corporate governance and accounting practices.

SEC Hearing on Corporate Governance in Washington, D.C. Ann Glickman (second from left); Barbara Lucas (far right); Richard Nesson (second from right); Peter Romeo (far left); Janet Zimmer (center) Courtesy of Richard Nesson

American business experienced a wave of corporate mergers during the 1960s. The effect of mergers on the economy, on investors subject to the tender offers (offers made to purchase the stock of investors or a company in a merger or acquisition), and on the stability of the market, had never been fully studied by the SEC.

Unexpected economic events also played a role. In the 1960s, Penn Central Transportation Company and New York Central merged to form Penn Central Company. Later, it was revealed that the merger was merely a ploy to provide new borrowing power for Penn Central's acquisitions, using New York Central's greater liquid resources. At that time, the law did not require full and complete disclosure of the details of the merger to stockholders in either the acquiring or target company. In June 1970, Penn Central Company collapsed. Representing up to that time the largest bankruptcy in American history, the corporation left thousands of investors with worthless stock.

Congress had previously responded by passing the Williams Act in 1968, which required that bidders include all details of their tender offer, such as terms, cash source, and their plans for the company after the takeover, in their filing to the SEC and to the target company.

A SEC staff report detailed the causes of the Penn Central collapse, citing "stretching of accounting principles to cover novel situations, emphasizing form over substance on a number of major transactions"… and using subsidiaries to engage in what "were essentially paper transactions which should not have been recorded as profit."(22)

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Footnotes:

(22) The Financial Collapse of the Penn Central Company, Staff Report of the SEC to the Senate Special Committee on Investigations, (August 1972), 4.

Related Museum Resources

Papers

September 27, 1965: Letter from U.S. Senator Harrison A. Williams, Jr. to SEC Chairman Manuel F. Cohen
[image] (pdf) (Government Records)
October 28, 1966: Memorandum from David L. Ratner to SEC Chairman Manuel Cohen on Takeover Bid Legislation
[document] (pdf) (Courtesy of David Ratner)
March 22, 1967: New York Stock Exchange Release backing Senate bill provding more information to stockholders during take-over bids
[image] (pdf) (Government Records)
April 14, 1967: "Take-Over Bids" - Remarks by SEC Chairman Manuel F. Cohen before the Association of the Bar of the City of New York
[image] (pdf) (Government Records)
February 14, 1969: Letter from SEC Chairman Manuel F. Cohen to U.S. Representative Hastings Keith supporting study into the effect of conglomerate activities in the securities markets
[image] (pdf) (Government Records)
June 30, 1969: 35th Annual Report of the Securities and Exchange Commission
[image] (pdf) (Government Records)

Photos

Early 1970s: SEC Hearing on Corporate Governance in Washington, D.C.

(front row) Peter Romeo, Ann Glickman, Janet Zimmer, Richard Nesson and Barbara Lucas; Roberta Karmel is in center in second row
(Courtesy of Richard Nesson )

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