(5) A number of important interpretations of the provisions of Section 11 (b) (1), together with determinations of general policy as to its administration, were handed down by the Commission in passing on specific questions raised in proceedings involving The North American Company (Holding Company Act Release Nos. 3405 and 3630), Engineers Public Service Company (Release No. 2897) and The United Gas Improvement Company (Release Nos. 2913 and 3511).

(6) A number of transactions proposed by registered holding companies or their subsidiaries pursuant to Section 11 (e) and other applicable sections, and tending to effectuate partial or substantial compliance with the requirements of Section 11 (b) (1), were approved by the Commission. The following holding companies were among those affected:

This section of the Act makes it the duty of the Commission to require registered holding companies and their subsidiaries to take such steps "as the Commission shall find necessary to insure that the corporate structure or continued existence of any company in the holding-company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holdingcompany system." This section also provides that not more than three tiers of companies may be permitted in any holding company system and concludes with the proviso that "Except for the purpose of fairly and equitably distributing voting power among the security holders of such company, nothing in this paragraph shall authorize the Commission to require any change in the corporate structure or existence of any company which is not a holding company, or of any company whose principal business is that of a public-utility company."

2/ Section 11 (e) plan.

The important developments in the administration of Section 11 (b) (2) in the past fiscal year may be summarized as follows:

(1) Under this provision the Commission instituted proceedings against the following companies:

(2) Section 11 (b) (2) hearings were held with respect to the following
holding company systems:

3615

3595

(3) Orders were entered by the Commission prescribing action which companies in some of the major holding-company systems must take to comply with the simplification requirements of Section 11 (b) (2), including those in the following cases:

(4) A number of transactions proposed by registered holding companies or their subsidiaries pursuant to Section 11 (e) and other applicable sections, and tending to effectuate full or partial compliance with the requirements of Section 11 (b) (2), were approved by the Commission. The following companies were among those affected:

Section 11 (e) provides a means whereby holding companies and their subsidiaries may file plans designed to bring about compliance with Section 11 (b). Twenty-nine such plans were filed during the fiscal year. Before a plan can be approved it must be found fair and equitable to persons affected thereby. An interesting example of the application of the Commission's powers under Section 11 (e) and Section 1 (b) (2) respecting an operating company is the Jacksonville Gas Company case. Jacksonville Gas Company was on the verge of bankruptcy but was able to file a voluntary reorganization plan pursuant to Section 11 (e) of the Act. In the space of a very short period of time a complete reorganization was approved and was duly enforced at the company's request in the United States District Court in Florida.

3/ Section 11 (e) plan.

For the Commission's opinion see Holding Company Act Release No. 3570.
The Court's opinion approving the plan is reported, 46F. Supp. 852.

Public Utility Financing

At the close of the last fiscal year, 65 applications and declarations pursuant to Sections 6 and 7 were pending, and 199 were filed during the year ended June 30, 1942. Of these, 164 were approved, 11 were withdrawn or dismissed, and 6 were denied, leaving 83 pending at the close of the fiscal year.

Of the 164 approved applications and declarations, 124 pertained to security issu— ance and 40 to assumption of liability and alteration of rights.

The issues covered by the 124 approved applications and declarations totaled $631,661,484. They were of the following types and for the following purposes:

The past year has provided the first opportunity for scrutiny of the operation of Hule U-50, which was adopted by the Commission on April 7, 1941 5/ and became effective May 7, 1941. This rule prescribes public invitation of sealed bids in connection with the sale of securities by registered public utility holding companies and their subsidiFrom the effective date of the rule to June 30, 1942, twenty-three security issues were sold at competitive bidding thereunder. The number of bids for the various issues was as follows:

Two of the bond issues, aggregating $39,243,000, were bid in by insurance companies, and investment banking houses or groups thereof were the successful bidders for the remainder. Two of the preferred stock issues were the subject of "basket bids" with bonds of the same companies. In a few cases, the successful bid was that of the traditional underwriter.

5/ For a discussion of the reasons leading to the adoption of the rule, refer to Seventh Annual Report, pp. 98-102.

6/ The aggregates include $391,170,000 face value of bonds, $31,000,000 par value of preferred stocks and $7,929,006 bid price for 590,527 shares San Diego Gas & Electric Co. common stock. The Commission's publication "Security Issues of Electric & Gas Utilities 1935-42" may be referred to for data with respect to all of these issues except the common stock which was a portfolio sale and not a new issue.

Prior to the adoption of the competitive bidding rule, the Commission's staff had made a study of underwriting spreads prevailing during the five-year period ending January 1, 1940. It was found that slightly over one-half of the 159 utility mortgage bond issues covered by the study were sold by underwriters on the basis of a two-point spread and that the spread fell below that level in only four cases. The average spread for the 159 issues sold under the traditional method of private negotiation was 2.49 points ($2.49 per $100 bond).

As mentioned in Part 1, under "Securities Effectively Registered", the cost of flotation of corporate securities was the lowest during this fiscal year that it has been in the approximately eight-year period over which the Commission has kept records thereof. The decline in underwriting spreads has been most noticeable in the offerings under Rule U-50. The spread in 6 of the 13 mortgage bond issues offered to the public 7/ following bids made under this rule was less than one point per issue, a circumstance not equalled in other recent corporate offerings except for a number of serial issues (principally railroad equipment issues which are also required to be sold through competitive bidding). The spread, in percent of dollar proceeds registered for sale under the Securities Act, averaged 1.12 for the 15 "bank quality" bond issues offered to the public following bids made under this rule, compared with about 1.9 for 26 "bank quality" bond issues registered under the Securities Act and offered to the public between May 7, 1941 and June 30, 1942 but not subject to Rule U-50.

Exemption Cases

Generally speaking, Sections 2 and 3 of the Act contain definitions and exemption provisions pursuant to which the Commission determines whether companies are subject to the regulatory provisions of the Act.

In the past fiscal year the Commission disposed of applications filed by Moreau Manufacturing Company, 8/ Pacific Gas and Electric Company 9/ and Public Service Corporation of New Jersey 10/ each of which sought to be declared not to be a subsidiary of specified companies. All of these applications were denied because the Commission could not find that the applicants were not subject to the controlling influence defined in Section 2 (a) (8) by the specified holding companies. Another case of importance was the application filed by Standard Oil Company (New Jersey) for exemption as a holding company pursuant to paragraph 3 of Section 3 (a). This application was also denied but the operation of the Commission's order was suspended for a period of six months because of the problems arising from the applicant's interest in other businesses and its expressed willingness to cooperate with the Commission in the solving of its problems under the Act. 11/

7/ The 18 bond issues for which bids were submitted under Rule U-50 included 15 mortgage issues of which 2 were bid in by insurance companies, 2 collateral trust issues, and 1 Debenture issue. All of the 16 offerings to the public were rated "bank-quality" except the Debenture issue. All were offered within the fiscal year, except the 2 collateral trust issues which were offered just prior to the commencement thereof. One of the collateral trust issues (a serial note issue) was also offered with a spread of less than one point.

8/ Holding Company Act Release No. 2868.

9/ Holding Company Act Release No. 2988. The Commission's ruling was sustained on appeal; 127 F. (2d) 378.

10/ Holding Company Act Release Nos. 2998 and 3058. The Commission's ruling was sustained on appeal; 129 F. (2d) 899.

11/ Holding Company Act Release Nos. 3312 and 3322.