After appropriate notice, a public hearing was held at which no security holders or other members of the public appeared, and we have heard no objections to the application from them.

Inasmuch as the issue and sale of the securities have previously been exempted from the provisions of section 6 (a) and the competitive bidding requirements of rule U-50 (Louisville Gas & Electric Co. (Kentucky), Holding Company Act Release No. 3086) we consider here only the standards of section 10 governing the acquisition of the securities by Standard, and the standards of section 12 (f) relating to transactions between companies in the same holding-company system. Under section 10 (b) (3) of the act we may not approve the acquisition by Standard if we find that it "will unduly complicate the capital structure of the holding company system of the applicant or will be detrimental to the public interest or the interest of investors or consumers or the proper functioning of such holding company system." Apart from the present block of 150,000 shares of common stock of the Kentucky Co. (23,705 shares of which were owned by the public on January 12, 1942), the Kentucky Co. has outstanding 883,839 shares of common stock all of which are owned by the Delaware Co. The Delaware Co. has outstanding 600,374 shares of class A stock (aggregate stated value $15,299,303.81), which is really a participating preferred stock, and 300,949 shares of class B stock (aggregate stated value $7,770,360.68), substantially all of which are owned by Standard. The present acquisition would have the effect of giving Standard a direct investment in the Kentucky Co. in addition to its indirect investment through the Delaware Co. However, in view of the circumstances of this case we do not find that this acquisition will unduly complicate the capital structure of the Standard Gas system.

In proceedings under section 11 (b) (1) of the act regarding Standard Gas & Electric Co., we ordered that company to divest itself of its interests in the Kentucky Co. and the Delaware Co., including stock of both companies "as the same may from time to time be acquired." In the Matter of Standard Gas and Electric Company et al., Holding Company Act Release No. 2929. Thus, the stock which Standard would acquire pursuant to this application, it would have to dispose of pursuant to our order. Under these circumstances we do not find that the acquisition is "detrimental to the carrying out of the provisions of section 11" and we further find that the acquisition will serve the public interest by tending toward the economical and efficient development of the Louisville system. In the Matter of Halsey, Stuart & Co., 4 S. E. C. 97 (1938); In the Matter of Associated Power Corp., et al., 5 S. E. C. 199 (1939). Thus, the standards of section 10 (c) are complied with.

The funds which Standard proposes to use for this acquisition consist of a portion of the proceeds of the sale by it of shares of San Diego Gas & Electric Co., formerly a subsidiary of Standard. See Standard Gas and Electric Company, Holding Company Act Release No. 2841, (1941). We pointed out in our findings in that case, that Standard is faced with the serious necessity of reducing its funded debt, amounting to more than $63,000,000 at the present time. However, the proposed acquisition by Standard is a fulfillment of the commitment it made in May 1941 which we have above referred to; and Standard (including its note and debenture holders) has received the advantages which resulted from the refunding of the preferred stock of the Kentucky Co. This increased the earnings of the Kentucky Co. common stock and, therefore, of the Delaware Co. class B stock, inuring to the benefit of the note and debenture holders of Standard. For this reason we do not believe that the proposed acquisition is detrimental to the interest of investors within the meaning of section 10 (b) (3).

Inasmuch as the sale of the shares to Standard is being approved pursuant to section 10 of the act, rule U-50 (a) (3) exempts said sale from the competitive bidding requirements of rule U-50 (b) and (c).

An appropriate order will issue.

By the Commission (Chairman Purcell and Commissioners Healy and Pike), Commissioners Eicher and Burke being absent and not participating.

[SEAL]

FRANCIS P. BRASSOR, Secretary.

(On January 28, 1942, Mr. Thomas Graham, of The Bankers Bond Co., Kentucky Home Life Building, Louisville, Ky., requested by letter that the following newspaper clippings be inserted into the record regarding the Louisville Gas & Electric Co. offering:)

[From the Louisville (Ky.) Courier-Journal, Wednesday morning, January 28, 1942] ODD LOTS

(By Donald McWain, the Courier-Journal Financial Editor)

LOUISVILLE GAS BOND DEAL SHEDS NEW LIGHT ON UTILITY FINANCING

Jesse Jones, Federal Loan Administrator, Tuesday told a Senate committee that the Reconstruction Finance Corporation needs more money. This means that previous appropriations are approaching exhaustion.

Utilities executives traditionally have been for "free enterprise." Mr. Jones has been praised by some Washington columnists as for "free enterprise" at heart, and his background as a banker and successful businessman would give that impression.

Louisville Gas & Electric Co. has applied to the Securities and Exchange Commission through a subsidiary, the Louisville Transmission Co., for permission to borrow $3,850,000 from the Reconstruction Finance Corporation. This constitutes an appeal by private enterprise to borrow public money for a transmission line, which has value in our war effort.

In this connection Thomas Graham, of Bankers Bond Co., under date of January 16, 1942, wrote Mr. Jones about this financing. His letter, which may be of interest to the utility management, stockholders, and gas and electric consumers in this area, follows in part:

BONDS GUARANTEED

"I notice from the enclosed release by the Securities and Exchange Commission that the Reconstruction Finance Corporation has agreed to make a loan to the Louisville Transmission Co. of Kentucky of $3,850,000 at 4 percent, the loan to be guaranteed, principal and interest, by the Louisville Gas & Electric Co. of Kentucky. This project is of greatest importance to the defense set-up of this whole area, and properly this loan should be negotiated by the Reconstruction Finance Corporation if no private financing can be effected by the company. "The best indication of the credit of the Louisville Gas & Electric Co. of Kentucky is the current listed market on Louisville Gas & Electric Co. first-mortgage 32-percent bonds, which are quoted today 1084 bid, 110 asked.

"While the Louisville Transmission Co. is a subsidiary of the Louisville Gas & Electric Co., the fact that the bonds are to be guaranteed by the parent company indicates, in the writer's opinion, that the rate on the proposed issue should certainly not be over 31⁄2 percent, and perhaps lower, dependent on the proposed set-up of the issue.

"May I respectfully call to your attention the fact that if competitive bids were asked for by the Securities and Exchange Commission on this piece of financing, or if the loan was sold regionally to dealers in the particular area which the company serves, there is no doubt that there would be a considerable saving in interest-which is to the advantage of the stockholders of the company and to the public of Kentucky. Also, this would relieve the Reconstruction Finance Corporation of the necessity of making this loan and allow these funds to be used for other direct defense construction purposes.

"The investment dealers of Kentucky, large and small, would be very much pleased to be able to render this service to their Government at this time. Attached you will find clippings regarding this subject taken from the CourierJournal of January 15 and 16."

COMPANY SELLS 13,518 SHARES

Securities dealers insisted in the Louisville Gas & Electric Co. of Kentucky common stock case that a price of $23.50 a share would be too high to charge the public for the shares. Their position was outlined to the utility management, to the head of Standard Gas & Electric Co. and to the Securities and Exchange Commission.

The utility management, Standard Gas & Electric's chairman and the Securities and Exchange Commission all approved public sale of the stock by the utility's own sales organization to the public at $23.50 a share. The Securities and Exchange Commission went on record that the price was "not outside a reasonable range."

The result was that up to January 12, the company's sales organization disposed of only 13,518 shares of the stock at $23.50. Dealers in various cities who chose to cooperate with the company sold an additional 10,277 shares at $23.50 a share, out of which they retained a commission of 75 cents a share.

APPRAISALS COMPARED

As a result, the Louisville Gas & Electric Co. now is asking the Securities and Exchange Commission to reverse its policy by permitting Standard Gas & Electric Co. to add to its holdings in the Louisville utility situation. Only a few months ago, Securities and Exchange Commission ordered Standard Gas & Electric to divest itself of holdings in a variety of subsidiaries, including the Louisville utility. The price to Standard would be $22.75 a share; to the public, $23.50 a share.

If the dealers were correct in their appraisal of the securities market in the common stock case; that is, that $23.50 was too high for the common stock, and if the company and the Securities and Exchange Commission were wrong in their appraisal of public demand for the shares, is it not possible that securities dealers may be right and that the Louisville Transmission Co. bonds are worth even more than the appraisal being placed on them by the company's management in its Reconstruction Finance Corporation deal?

The situation demonstrates one thing for a certainty. The securities dealers have no "hard feelings" over the decision of the company to undertake sale of the stock through its own sales organization, because the dealers are right back offering the company an even better price for the bonds than the management is exacting from Reconstruction Finance Corporation.

[From the Louisville (Ky.) Courier-Journal, Wednesday morning, January 28, 1942]

LOUISVILLE GAS PETITIONS TO SELL STOCK UPSTREAM

WASHINGTON, January 27 (AP)—Permission of the Securities and Exchange Commission for Standard Gas & Electric Co. to buy common stock of its subsidiary, the Louisville Gas & Electric Co., of Kentucky, was asked today by officers of those concerns.

Treasurers of the respective concerns told Securities and Exchange Commission Examiner Robert R. Reeder that parent company purchasing was necessary because the public and dealers were not taking sufficient amounts of the stock to meet Louisville Gas & Electric financial requirements.

TWENTY-THREE THOUSAND SEVEN HUNDRED AND NINETY-FIVE SHARES SOLD

J. J. McKenna of Louisville Gas & Electric testified that his company needed $500,000 monthly from sale of the stock to complete a $7,000,000 construction program undertaken in expansion of facilities.

The Louisville man added that through January 12 only 23,795 shares had been sold, 10,277 of them going to dealers and brokers. Standard's treasurer, George W. Knourek, Chicago, said his company proposed to supplement public buying by taking as many shares at $22.75 each as would be necessary to bring total sales to the $500,000 monthly needed by Louisville Gas & Electric.

Both McKenna and Knourek reported that they did not know whether there was any understanding between the parent concern and its subsidiary at the time the stock was issued that the parent would do supplementary buying, if necessary, at $22.75 a share.

M'KENNA CITES CONFIDENCE

"I felt confident we could sell that stock to the public," McKenna said, adding that "a number of unforeseen things have happened since then."

Knourek testified under questioning by Securities and Exchange Commission Attorney Frederick Zazove that Standard's proposed investment in the stock would yield it 6.59 percent.

No opponents of the proposal appeared and Examiner Reeder recessed the hearing "until further call" at the request of Zazove, who said he wanted the additional time to "see what turns."

I. AVERAGE AMOUNT OF REGISTERED ISSUES OF $500,000 AND UNDER FOR 18 INDUSTRIES DURING 4-YEAR PERIOD

Representative Wadsworth inquired (at pp. 659 and 664 of the printed transcript) what was the average size of registered issues of $500,000 or less. The total number of registration statements for issues of $500,000 or less in 18

industry categories during the period from July 1, 1936, to June 30, 1940, was 594. The total amount of all of those issues was $164,718,867. The average amount covered by the 594 registration statements was $277,304.

J. BREAK-DOWN BY INDUSTRIES OF COMMISSIONS FRAUD CASES INVOLVING $500,000 OR LESS

Representative Youngdahl (at p. 660 of the printed transcript) asked for a break-down by industries of the figures I presented as to the Commission's investigations, criminal references, and injunctive suits for the fiscal year 1940-41 involving fraud in the sale of security issues of $500,000 or less. I am submitting for inclusion in the record a table which breaks down these figures into seven categories according to the type of business of the issuer.

Break-down according to industries of report of summary of investigations of the Securities and Exchange Commission for the fiscal year 1940-41 involving fraud in sale and promotion of security issues of $500,000 or less

1 In the original report we had reported 98 cases in this bracket; the figure should have been 97. In cases where criminal and civil action were both taken, the cases are listed in the criminal column only as in the original report.

K. RULE U-50, COMPETITIVE BIDDING

The chairman (at p. 741 of the printed transcript) asked for a statement explaining the Commission's authority for promulgating rule U-50, the competitive-bidding rule under the Public Utility Holding Company Act, and inquired as to the evils leading to the adoption of that rule. Representative Wadsworth (at p. 742) asked for fair samples of briefs submitted to the Commission by both sides on the question of competitive bidding. Representative Reece (at p. 742 of the printed transcript) asked for a copy of the Commission's report on its competitive-bidding study.

I have handed to the clerk of the committee, for the use of its members, (a) a copy of the report of the Public Utility Division of the Commission on the problem of maintaining arm's-length bargaining and competitive conditions in the sale and distribution of securities of registered public-utility holding companies and their subsidiaries; (b) a copy of the Commission's statement upon the promulgation of rule U-50, which was published as Holding Company Act Release No. 2676; (c) 12 copies of a tabulation Competitive Bids submitted for Security Issues Sold Pursuant to Rule U-50 under the Public Utility Holding Company Act of 1935, May 7, 1941, to November 26, 1941," together with copies of a short statement which I have had prepared by way of describing that tabulation; and (d) one copy each of the briefs filed in connection with the public conference on competitive bidding by William Chamberlain, the Investment Bankers Association of America, Morgan Stanley & Co., the National Association of Securities Dealers, Inc., and Otis & Co.

L. STATEMENT OF CHAIRMAN PURCELL ON REPRESENTATIVE BOREN'S PROPOSED SECTION 3 (a) (10)

On November 27, 1941, Representative Boren inserted in the record a proposal to enact a new section 3 (a) (10) of the Securities Act of 1933. This proposai appears at page 753 of the transcript and reads as follows:

"(10) Any security which is a legal investment for a national-banking association under section 5136 of the Revised Statutes, as amended, issued by a person which (A) has any security registered under this title, is subject to section 6 (c), and has filed the annual and other periodic reports required pursuant to this title andtherules or regulations thereunder, or (B) has any security listed and registered under the Securities Exchange Act of 1934, as amended, and has filed the annual and other periodic reports required pursuant to such act and the rules or regulations, thereunder or (c) issues or sells such security pursuant to sections 6, 7, 11, or 12 (d) of the Public Utility Holding Company Act of 1935, or (D) is registered under the investment Company Act of 1940 and has filed the annual and other periodic reports required pursuant to such act and the rules or regulations thereunder, or (E) issues or sells such security pursuant to section 204 of the Federal Water Power Act, as amended."

Mr. Boren has asked us for our comments on this proposal and we are glad to give them.

The effect of Mr. Boren's proposal would be automatically to exempt from the registration and prospectus requirements of the Securities Act any security which is a legal investment, pursuant to section 5136 of the Revised Statutes, for national banks if the issuer had previously registered under either the Securities Act of 1933, the Securities Exchange Act of 1934, or the Investment Company Act of 1940, and had filed the periodic reports required under those acts, or if the issue is sold pursuant to certain sections of the Public Utility Holding Company Act of 1935, or the Federal Power Act.

Section 5136 of the Revised Statutes limits national banks to investment securities which are defined as marketable obligations evidencing indebtedness in the form of bonds, notes and/or debentures. The Controller of the Currency is given authority further to define the term investment securities. The Controller of the Currency has issued regulations which define the term as meaning salable under ordinary circumstances with reasonable promptness at a fair value and having one or more of the following characteristics:

(a) A public distribution of the securities must have been provided for or made in a manner to protect or insure the marketability of the issue; or

(b) Other existing securities of the obligor must have such a public distribution as to protect or insure the marketability of the issue under consideration; or (c) In the absence of such public distribution, the issue must be by an established commercial or industrial business that can demonstrate the ability to service such securities, the debt evidenced thereby must mature in not more than 10 years and must be of sound value or so secured as reasonably to assure payment, and there must be amortization provisions to provide for at least 75 percent of the principal.

It is apparent from a consideration of section 5136 of the Revised Statutes and of the regulations issued thereunder that they do not purport to set up exact standards or norms on the basis of which lists of specific securities can be made up. They provide no more than a general guide to assist the Controller of the Currency in determining whether specific securities in the portfolios of the banks which he examines appear to qualify under these general standards.

Operating under the section banks purchase securities on the basis of their own judgment as to whether they meet the necessary requirements. If (after acquisition) a particular security in a bank's portfolio is questioned by the Controller as having been illegally acquired and therefore as being ineligible under section 5136, the burden of proving that the security was eligible is on the bank. Standards, therefore, do not have to be as definite as standards for exemption written into the Securities Act. If a bank makes a mistake in acquiring a security the Controller can order it to dispose of the security, but if an issuer of securities has once made a public offering to the public, the matter cannot be easily undone. Stated briefly, the determination as to whether a particular security falls within the general classifications established by section 5136 of the Revised Statutes and the regulations promulgated thereunder calls for the exercise of judgment and opinion involving an appraisal of the merits of a security. Such a procedure, by its very nature, precludes the possibility of determining precisely which securities would and which would not be exempt under the proposed section 3 (a) (10).

As I pointed out above, in order to be eligible for the exemption the securities must not only be debt securities but must also be issued by a person who has registered under the Securities Act, the Securities, Exchange Act or the