The FTC also could take steps to help the inner-city community assume a stronger competitive position by providing instruction on organizing buyer associations or cooperatives to take advantage of the lower prices afforded to those who buy in large quantities. Further, the Agency could promote minority business entrepreneurship by offering advice on business organization and on banking and investment practices. The Clayton Act also offers the FTC sufficient flexibility to permit special arrangements to facilitate minority entrepreneurship. On one case, the FTC took advantage of the flexibility afforded it for that purpose. Under a 1968 FTC advisory opinion an apparel manufacturer was permitted to provide extended credit terms to one class of his customers and was advised that this would not contravene the antitrust laws.158 Under this opinion, extended credit terms could be given if:

1. The business is a newly established business located in an urban ghetto-type area;

2. The proprietor or principal owner of the business is a resident of the urban inner core, ghetto-type area within which the business is located;

3. In light of its ownership, management, and location, the business stands a reasonable chance of survival.159

One year after its advisory opinion the FTC received a followup report from the manufacturer. According to the report, 41 stores had been opened under the program, 14 were to be opened in the near future, and 34 additional stores were being contemplated. Of the 41 stores opened, many were so successful that they were able to repay some of their invoices and avoid the necessity for extended credit.

ested in this area and has indicated in various speeches the valuable role the FTC could play. Addresses by Mary Gardiner Jones, Commissioner, The Revolution of Rising Expectations: The Ghetto's Challenge to American Business, annual meeting of the National Association of Food Chains, Oct. 16, 1967; The Urgent Need for Consumer Protection in our Inner Cities, Twin Cities Federal Executive Board, May 24, 1968; Our Most Urgent Task: To Protect the Consumer Needs of our Poverty-Stricken Families, Greater Miami Section National Council of Jewish Women, Inc., Apr. 22, 1966.

158 FTC Advisory Opinion No. 253, May 25, 1968.

159 Id.

B. Securities and Exchange Commission (SEC)

The SEC administers several statutes dealing with securities, all enacted for the protection of investors and the public. Two of its statutory duties have important civil rights implications: (1) disclosure of relevant financial information by companies offering stock or other securities to the public; and (2) SEC rules and regulations permitting stockholders to use the proxy mechanism to raise issues relevant to the management of the corporation.

1. DISCLOSURE OF INFORMATION

The Securities Act of 1933 and the Securities Exchange Act of 1934 require full and fair disclosure of all pertinent facts by any company wishing to sell stock to the public. 160 To facilitate the disclosure required by the act, the Securities and Exchange Commission has drawn up forms which describe the format in which information must be given to investors.

Among the items on the forms is a "description of business" which appears as item 9 on SEC's form S-1.161

160 The Securities Act of 1933 and Securities Exchange Act of 1934 were designed to facilitate informed investment analysis and prudent and discriminating investment decisions by the investing public. It is the investor, not the SEC, who must make the ultimate judgment of the worth of securities offered for sale. The SEC is powerless to pass upon the merits of securities, and assuming proper disclosure of financial and other information essential to informed investment analysis, the SEC cannot bar the sale of securities which such analysis may show to be of questionable value.

The SEC is the repository of information for companies who issue bonds or shares of stocks across State lines. It makes certain, through its laws and regulations, that pertinent financial information is disclosed to it for the use of the general public. The SEC, therefore, does not directly regulate the purchase or sale of bonds or stocks, as opposed to other regulatory agencies which actually regulate the performance, rates, licenses, et cetera, of different industries. Interview with Meyer Eisenberg, staff attorney, General Counsel's office, SEC, Mar. 11, 1970.

66

Item 9(c) of form S-1 requires that

.. if a material part of the business of the registrant and its subsidiaries is dependent upon a single customer, or a very few customers, the loss of any one of which would have a materially adverse effect on the registrant..." such facts must be included within the prospectus.162 The release also requires, in the case of such customer, disclosure of "other material facts with respect to their relationship." This would seem to require the company to disclose any facts in its knowledge which could result in the termination of its contract with this customer. These provisions for disclosure also would seem to require a company to disclose the status of its compliance with Federal contracting requirements, including those related to equal employment opportunity.

At present, the registrant company is responsible for determining what facts should be disclosed in the registration statement. The SEC offers no specific guidance with respect to civil rights related issues which should be reported. There is a need for the Agency to issue such guidelines setting forth the types of action to be reported, including, but not limited to, judicial or administrative actions in the civil rights area against the registrant.

Under these guidelines, the SEC could insist

istrant and its subsidiaries is dependent upon a single customer, or a very few customers, the loss of any one of which would have a materially adverse effect on the registrant, the name of the customer or customers and other material facts with respect to their relationship, if any, to the registrant and the importance of the business to the registrant shall be stated." Release No. 4988, Securities Act of 1933, July 14, 1969.

162

“2 Id. In addition, instruction 4 to item 9 of form S-1 requires that: Appropriate disclosure shall be made with respect to any material portion of the business which may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.

Further, item 12 of form S-1 requires disclosure with respect to material pending legal proceedings. A key term in the instructions to item 12 is "material" which is defined by rule 405 under the Securities Act as follows:

"The term "material," when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters as to which an average prudent investor ought reasonably to be informed before purchasing the security registered" (italic added).

that a registering company with substantial Government contracts, which has been debarred or otherwise subject to sanctions under Executive Order 11246, disclose this information in its registration statement.163 By the same token, disclosure of a Department of Justice pattern or practice suit brought under section 707 of the Civil Rights Act of 1964, an EEOC finding of employment discrimination, or a law suit filed by a private party under section 706 of the Civil Rights Act of 1964, also should be required. For example, the Duke Power Co. has been in litigation since 1968 for allegedly violating Title VII of the Civil Rights Act of 1964.164 The company's latest registration statement, filed with the SEC under the Securities Act of 1933, fails to disclose the pending legal proceeding.165 In addition, if the ICC, the CAB, or the FPC should issue a rule prohibiting employment discrimination by their regulatees, as the FCC has done, a regulatee found to be in noncompliance with the rule should be required to disclose this fact to the SEC. Indeed, the action which a regulatory agency can take is much more significant than the mere loss of a contract. It involves the basic right of the company to continue in business.

These civil rights violations are "material" under item 12 of form S-1 and must be disclosed in order to inform "an average prudent investor" 166 of the possible financial repercussions that such legal or administrative proceedings would have on the companies.

167

163 This is not the present policy of the SEC. When asked whether the SEC would adopt such a policy, Charles Shreve, former Director, Division of Corporation Finance, SEC, indicated to Commission staff that the SEC would take this matter under advisement. Interview with Charles Shreve, Feb. 12, 1970. At the present time, the SEC has not passed on this Commission's suggestion, mainly due to staff changes in SEC's Division of Corporation Finance. As of June 1970, the SEC still had the matter under its consideration. Interview with Alan B. Levenson, Director, Division of Corporation Finance, SEC, June 4, 1970.

Disclosure by companies debarred or subjected to other sanctions under Executive Order 11246, Title VII of the Civil Rights Act of 1964, or nondiscrimination rules of regulatory agencies, not only could be of assistance in assuring compliance with nondiscrimination requirements, but is necessary to protect the public investor. For example, as noted earlier,168 the Federal Power Commission issued an order on September 8, 1969, granting a petition filed by the California Rural Legal Assistance (CRLA) to intervene in the application proceedings for a license to construct a hydroelectric plant by the Pacific Gas & Electric Co. (P.G. & E.). CRLA alleged that the company's application for a license should be denied because of its failure to provide equal employment opportunity. It is likely that the project for which the license was sought is economically substantial and that the earning potential of P.G. & E. would be affected by a denial of the license. Furthermore, all future license applications of P.G. & E. would be affected by this review of the company's equal employment status. A stockholder or potential stockholder of P.G. & E. should be entitled to know of the action pending against the company.

Similarly, in 1968, the Office of Federal Contract Compliance issued notices warning seven companies of impending Government debarment action. Three of the companies-Timkin Roller Bearing, Bemus Paper, and Bethlehem Steel-reached the stage of debarment hearings. During the public hearings, Timkin Roller Bearing and Bemus agreed to comply with Executive Order 11246. The Bethlehem Steel case is still pending and its registration statement at the SEC fails to disclose OFCC's debarment action.169 If any of these companies went through a public stock offering after they were warned of possible debarment action, potential investors were entitled to know

Act of 1964 or Executive Order 11246 would be deemed material as that term is defined under rule 405 for purposes of disclosure in registration statements. In such cases, the Commission has no authority to require such disclosure." Letter from Hugh F. Owens, Commissioner, SEC, to Howard A. Glickstein, Staff Director, U.S. Commission on Civil Rights, July 24, 1970. 168 See note 15, at p. 270 supra; and note 41, at p. 275 supra.

160 SEC, form S-7, registration No. 2-37104, filed Apr. 17, 1970.

that sanctions might be imposed on the companies.

2. STOCKHOLDERS' ABILITY TO RAISE MANAGEMENT ISSUES

A stockholder may bring to the attention of other security holders, by utilization of a stockholder's proxy proposal, issues which he deems relevant to the management of a corporation. In order to preclude abuses by persons seeking personal ends to the detriment of stockholders and the corporation, and to facilitate the submission of stockholder's proposals at shareholder meetings, the SEC adopted rule X-14A7. The regulation limits the subject matters which may be raised by stockholders. As adopted on December 18, 1942, the rule specifies that the proposal must be a "proper subject for action". Throughout the years, the SEC has limited its definition of "proper subject". Specifically excluded from the meaning of that term are "general economic, political, racial, religious, social, or similar causes" 170

The restriction prohibiting use of proxy mechanisms for the purpose of promoting "general economic, political, racial, religious, social, or similar causes" substantially limits the freedom of stockholders to challenge corporate employment and other policies.171 To some extent, this SEC restriction is an anachronism. It is a holdover from a time when social considerations were considered irrelevant or inconsistent with the vital interests of business. In recent years, however, many of the Nation's leading business organizations and trade associations have recognized the need to become closely involved in problems of social and economic injustice. In the deepest sense, these companies have recognized that if they are to thrive economically, they can no longer ignore the problems that underlie social unrest and racial alienation.

170 17 C.F.R. 240.14a-8 (c) (2). However, the SEC indicated in its letter to the U.S. Commission on Civil Rights that rule 14-8 "does not automatically prohibit inclusion in proxy material of shareholder proposals relating to employment practices of a company subject to the rule." Letter from Hugh F. Owens, Commissioner supra note 167.

171 See, letter from Donald F. Schwartz, professor of law, Georgetown University Law Center, to the Division of Corporation Finance, SEC, Mar. 10, 1970, for a comprehensive discussion on the subject of stockholders' ability to raise management issues.

In addition, there are sound financial reasons for abolishing this prohibition. Title VII of the Civil Rights Act of 1964 provides an individual with a right to sue employers, labor organizations, and others for discriminatory employment practices. The prospect of litigation is of legitimate concern to an investor or stockholder. A proposal which would require management to be an equal opportunity employer and to take steps to overcome the effects of its past discrimination by establishing an affirmative action program, therefore, would be relevant and a "proper subject." 172 Yet, in at least

172 Rule 14a-8 has been challenged in two cases: Peck v. Greyhound Corp., and Medical Committee for Human Rights v. SEC. Peck v. Greyhound Corp., 97 F. Supp. 679 (S.D.N.Y. 1951) involved a challenge to the segregated seating system which Greyhound maintained in the South. The stockholder proposed that the company's proxy material include “A Recommendation That Management Consider the Advisability of Abolishing the Segregated Seating System in the South." The SEC determined that the primary motive of the stockholder was to undo the segregated system maintained by Greyhound. Although the proposal was germane to the business of the company, the fact that the stockholder was motivated by social conscience precluded the inclusion of the stockholder's proposal in management's proxy material. The suit brought by James Peck challenged the SEC's refusal to demand that Greyhound include the proposal in its proxy material.

The district court refused to issue a temporary injunction and the matter ended there. The basis upon which the district court denied Peck's claim was that he had not exhausted his administrative remedies and therefore the issue of whether or not the SEC may constitutionally prohibit stockholders' proposals on racial issues was not reached.

Medical Committee for Human Rights v. Securities and Exchange Commission, C.A. No. 23105 (D.C. Cir. July 8, 1970). The medical committee, one of Dow Chemical Co.'s shareholders, requested that a resolution be submitted to Dow shareholders authorizing Dow's board of directors to amend the company's charter to prohibit the sale of napalm by Dow to any buyers refusing to give assurances that the napalm would not be used on or against human beings. Answering brief of the SEC, respondent, at 3.

Dow notified the SEC of the medical committee's proposal and advised both the Commission and the medical committee that it had decided to omit the proposal from its proxy materials. The proposal was omitted on grounds of ". . . promoting a general political, social or similar cause," and as solely consisting of a recommendation ". . . with respect to . . the conduct of . . . (Dow's) ordinary business operations. . . ." Id., at 4.

The SEC, on Mar. 24, 1969,

66

determined to

one case the SEC has ruled that requesting a company to hire on an equal opportunity basis is not a proper subject for a proxy.173

If the SEC should liberalize its current definition of "proper subject" to permit socially motivated stockholders to introduce proposals of civil rights importance, the potential impact could be overwhelming. The issues susceptible to resolution through use of the stockholder proxy mechanism are far-reaching. For example, companies that are abandoning inner-city ghetto areas could be directed by their stockholders to relocate there and provide additional goods and services to ghetto residents. Companies could be directed to institute training programs to expand employment opportunities for minority group members. Companies also could be directed to invest in the inner-city and seek other means of assisting in the creation of a sound economy in the ghetto. These are

raise no objection to the omission from the management's proxy statement of certain resolutions proposed by the Medical Committee for Human Rights." The SEC also denied the request of counsel for the medical committee to be heard by the Commission. On May 29, 1969, the medical committee filed a petition for review in the court of appeals. The SEC, in its brief, argued entirely on procedural grounds.

On July 8, 1970, the Washington, D.C. Court of Appeals ruled the corporate shareholders have the right to be involved in corporate policy decisions that have social impact and that they be allowed to vote on many of these issues by proxy or at shareholders' meetings. The court did not flatly order inclusion of the napalm resolution, but told the SEC to reconsider its ruling in light of the court's own finding that corporate proxy rules cannot be employed as "a shield to isolate such managerial decisions from shareholder control." Medical Committee For Human Rights v. Securities and Exchange Commission, No. 23 105 (D.C. Cir. July 8, 1970).

173 On Feb. 17, 1970, an organization named "Project on Corporate Responsibility," popularly known as Campaign GM, delivered to the General Motors Corp. nine stockholders' proxy proposals to be included at their annual meeting of shareholders to be held on May 22, 1970. The ninth proposal asked GM for an implementation of nondiscriminatory policies in selecting dealers and hiring employees. On Feb. 27, 1970, the General Motors Corp. determined that the nine proposals were the subject of unlawful proxy solicitation under rule 14a-8, and not a "proper subject for action." Letter from George W. Combe, Jr., secretary, General Motors Corp., to SEC, Feb. 27, 1970. The SEC determined on Mar. 18, 1970 not to take any enforcement action should General Motors omit proposals and proposals 4 through 9 from its proxy statement.

but a few examples of the kinds of proposals which might emanate from stockholders if the SEC were to remove its restrictions on the types of issues that may be raised through the mechanisms of stockholders proxies. Further, even in those cases where such proposals are not adopted by the stockholders, the introduction and full discussion of their merits could stimulate greater corporate concern and activity.174

174 The SEC has taken several limited actions of potential benefit to minority group members. The SEC Washington, D.C. regional office, for example, has created a program with Howard University which should serve as an example to other regulatory agencies.

Members of the SEC staff met with members of the Howard University Law School in order to create a symposium in Federal securities laws. The SEC members were distressed to find that Howard University Law School did not offer courses in security laws. This is an area, they believe, which is of prime importance to all minority groups. All minority groups must learn to understand the security law, its meaning and application, so as to make their entry into the world of securities easier.

The Commission's regional office plans to offer the symposium every year. Their next step should be to stimulate other SEC regional offices to establish similar programs. The FMC, FTC, FCC, CAB, FAC, and ICC should follow the SEC's example and offer lectures on their pertinent laws and regulations. This will not only be a public relations vehicle for each agency, but it will also stimulate minority group law students to become interested in fields of law which their curriculum presently ignores and possibly a few of them will seek employment with a regulatory agency. Interview with Alex Brown, Regional Administrator, Washington, D.C. office, SEC, Mar. 12, 1970.

The SEC and other Federal regulatory agencies' efforts should not be limited to law students. The regulatory agencies should extend their courses to groups of minority leaders, entrepreneurs, consumer protection groups, so as to familiarize a wider section of the community with their laws.

In addition, the SEC has adopted regulation A, pursuant to an act of Congress, to provide exemptions from the registration requirement as an aid primarily to small business. The law provides that offerings of securities not exceeding $300,000 may be exempted from registration, subject to such conditions as the Commission prescribes for the protection of investors. 15 U.S.C. 77c. (b). In addition, the SEC's regulation A permits certain domestic and Canadian companies to make exempt offerings not exceeding $300,000, provided certain specified conditions are met, including the prior filing of a simple "Notification" with the appropriate regional office and the use of an offering circular con

VI. SUMMARY

Over the past 80 years, Congress has created a number of regulatory agencies and provided them with authority to control the activities of specific industries. For example, the Interstate Commerce Commission regulates railroads and motor carriers; the Federal Communications Commission regulates radio and television stations, and telephone and telegraph companies; the Federal Power Commission regulates gas and electric companies; the Civil Aeronautics Board regulates airlines; the Federal Maritime Commission regulates water carriers.

Congress also has created regulatory agencies with responsibility for controlling specific business practices, rather than particular industries. For example, the Federal Trade Commission has responsibility for preventing deceptive business practices and unfair competition, regardless of the industries in which these practices occur. By the same token, the Securities and Exchange Commission has responsibility for protecting investors and the public by requiring full disclosure of financial information by companies offering stock or other securities. The SEC's authority also extends across industry lines.

The common standard governing all of these regulatory agencies is that of serving the public interest. There are a number of civil rights issues that necessarily arise in connection with the activities of the industries they regulate and, by close adherence to the standard of serving the public interest, the agencies could contribute substantially to furthering the cause of civil rights and contributing to social and economic justice.

taining certain basic information in the sale of securities.

Regulation A, even though it was adopted to aid small business, is a complicated registration form. In order to be effectively used by small businessmen, regulation A must be rearranged so as to make it easier to understand and be used by minority entrepreneurs. The Washington, D.C. regional office, for the past several months, has been drafting a simpler type of prospectus which could be filed under regulation A. The new prospectus will apply only within the jurisdiction covered by the Washington, D.C. regional office and is geared for the benefit of minority groups. Id.

Once a final draft is acceptable, the form should then be translated into Spanish in order to facilitate the use of the prospectus by Spanish-speaking minorities.