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acquired for distribution and that, among other things, sales to insiders, including accounts in which the member or its officers have an interest, in excess of their normal investment practice (unless otherwise provided in a prospectus), or withholding or refraining from making a public offering of all or any part of its participation to make an extra profit, are contrary to high standards of commercial honor and just and equitable principles of trade. With respect particularly to a practice of sales to such accounts primarily of new issues at a time when they are being quoted or sold above the offering price (so-called “hot issues”), and therefore may be resold at a profit, the NASD had pointed out that such a practice is questionable and should be the subject of careful consideration. A March 1959 clarification of the policy stated: “... it becomes apparent that allotments of a member's participation in a 'hot issue' to insider accounts (bona fide investments or other) in disproportionate amounts, as opposed to allotments to the public, would hardly indicate a genuine effort to sell such participation to public investors. Consideration should be given to the fairness of such ratios in the fulfillment of the member's obligation as a participant."

In its decision, representing its first ruling on the NASD's interpretation with respect to "free-riding” in connection with the distribution of a “hot issue,” the Commission expressed agreement with the NASD position that the basic requirement under the NASD's “freeriding” interpretation that a bona fide public offering be made is violated, regardless of the investment history or normal investment practice of an insider account, if a sale of a “hot issue” is made to such an account in an amount which is disproportionate in comparison with the amount being offered to the public by the member. The effect of such withholding, the Commission observed, is "not only to give to the insiders the opportunity for a profit on the shares withheld, which appears highly likely under the circumstances, and thereby deprive public investors of such opportunity, but also to restrict the supply and tend to raise the market price further and enable the insiders to realize an increased profit upon subsequent sale of the shares retained by them."

The Commission concluded that the NASD properly found that the sale by First California to its own Plan account of 26.6 percent of its allotment of Permanent Filter stock, at a time when the offering price of these shares was at least $1,600 less than the contemporaneous market price, was disproportionate in relation to the amount sold to public investors, and that the NASD rules had been violated. It

Securities Exchange Act Release No. 6586 (July 6, 1961).

also found that the penalty imposed by the Association was not excessive or oppressive.

The Commission sustained an order of the Association which suspended for 12 months the registration of Leonard H. Zigman as a registered representative. Zigman had appealed the action of the NASD, which found that he had engaged in a serious breach” of his obligations to his employer and as a securities salesman, and that his conduct was inconsistent with just and equitable principles of trade. The violation of NASD rules involved the maintenance by Zigman of an account with his employer in a fictitious name so as to conceal its true identity and on two occasions allocating to such account portions of the employer's participation in public offerings being quoted at above the offering price and immediately thereafter disposing of the shares at a profit. The Commission rejected Zigman's explanation of his conduct as an "implausible excuse" and sustained the 12-month suspension as not excessive or oppressive.64

04 Securities Exchange Act Release No. 6701 (January 5, 1962).

ADMINISTRATION OF THE PUBLIC UTILITY HOLDING

COMPANY ACT OF 1935

In administering the Public Utility Holding Company Act of 1935 the Commission regulates interstate public-utility holding company systems engaged in the electric utility business and/or in the retail distribution of gas. The Commission's jurisdiction also extends to natural gas pipeline companies and other nonutility companies which are subsidiaries of registered holding companies. Although the matters under the Act dealt with by the Commission and its staff embrace a variety of intricate and complex questions of law and fact generally involving more than one area of regulation, briefly there are three principal regulatory areas. The first covers those provisions of the Act, contained principally in Section 11(b) (1), which require the physical integration of public utility companies and functionally related properties of holding company systems and those provisions, contained principally in Section 11(b)(2), which require the simplification of intercorporate relationships and financial structures of holding company systems. The second covers the financing operations of registered holding companies and their subsidiaries, the acquisition and disposition of securities and properties, and certain accounting practices, servicing arrangements and intercompany transactions. The third includes the exemptive provisions of the Act, the provisions covering the status under the Act of persons and companies, and those regulating the right of a person affiliated with a public utility company to acquire securities resulting in a second such affiliation. Matters embraced within this area of regulation frequently come before the Commission and its staff. Many such matters do not result in formal proceedings and others are reflected in such proceedings only in an indirect manner when they are related to issues principally under one of the other areas of regulation.

The Branch of Public Utility Regulation of the Commission's Division of Corporate Regulation performs the principal functions under the Act. It observes and examines problems which arise in

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connection with transactions which are or may be subject to regulation under the Act and discusses such problems with interested persons and companies and advises them as to the applicable sections of the Act, the rules thereunder and Commission policy with respect thereto. Questions are raised with and problems are presented to the staff daily. These include questions raised by security holders and problems presented by companies contemplating transactions requiring the filing of an application or declaration, particularly financing operations and the acquisition and disposition of securities and properties. This day-to-day activity includes prefiling discussions and conferences, in person and by telephone, with company representatives and with other persons where the matter under consideration affects their interest. Members of the staff of this Division actively participate in hearings and often aid the Commission in the preparation of its decision on a particular matter. The staff continually reexamines the status of exempt companies, examines the annual reports filed with the Commission and those sent to stockholders and must keep abreast of new technical developments in the electric and gas industry, including the use of atomic energy as a source of power.

COMPOSITION OF REGISTERED HOLDING COMPANY SYSTEMS

At the close of the fiscal year there were 25 holding companies registered under the Act. Of these, 19 are included in the 17 remaining active registered holding company systems, two of which each have one subsidiary holding company. In these 17 active systems, there are 90 electric and/or gas utility subsidiaries, 40 nonutility subsidiaries and 13 inactive companies, totaling 162 system companies. The following table shows the number of holding companies, the number of subsidiaries, classified as utility, nonutility and inactive, in each of the active systems as of June 30, 1962, and their aggregate assets, less valuation reserves, as of December 31, 1961, which amounted to $11,788,576,000:

1 Registered holding companies excluded from the active list are: C. E. Burlingame Corp.; Colonial Utilities Corp. ; British American Utilities Corp.; Kinzua Oil & Gas Corp. and its subholding company, Northwestern Pennsylvania Gas Corp.; and Standard Gas & Electric Co.

Classification of companies as of June 30, 1962

System

Solely Regis- Electric
regis- tered and/or Non-

tered holding- gas utility
holding operat- utility subsid-

com- ing subsid- laries panies com- iaries

panies

Aggregate Inac

system tive Total

assets, less com- com- valuation panies panies reserves at

Dec. 31, 1961 (thousands)

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1. Allegheny Power System, Inc. 2. American Electric Power Co., Inc. 3. American Natural Gas Co... 4. Central and South West Corp.,5. Columbia Gas System, Inc., The. 6. Consolidated Natural Gas Co.. 7. Delaware Power & Light Co.. 8. Eastern Utilities Associates. 9. General Public Utilities Corp. 10. Granite City Generating Co. (Voting

Trustees). 11. Middle South Utilities, Inc.12. National Fuel Gas Co. 13. New England Electric System. 14. Ohio Edison Co.. 15. Philadelphia Electric Power Co.. 16. Southern Co., The 17. Utah Power & Light Co...

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Subtotals.
Less: Adjustment to eliminate duplica-

tion in count resulting from 3 compan.
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i Represents the consolidated assets, less valuation reserves, of each system as reported to the Commission on Form U5S for the year 1961, except as otherwise noted.

i Represents total net assets, as of March 1, 1962, after deducting estimated reserves for miscellaneous fees and expenses in connection with proposed liquidation of the voting trust.

3 These 5 companies are Beech Bottom Power Co., Inc. and Windsor Power House Coal Co., which are indirect subsidiaries of American Electric Power Co., Inc. and Allegheny Power System, Inc.; Ohio Valley Electric Corp. and its subsidiary, Indiana-Kentucky Electric Corp. which are owned 37.8 percent by American Electric Power Co., Inc., 16.5 percent by Ohio Edison Co., 12.5 percent by Allegheny Power System, Inc., and 33.2 percent by other companics; and The Arklahoma Corp., which is owned 32 percent by Central and South West Corp. System, 34 percent by Middle South Utilities, Inc. system and 34 percent by an olectric utility company not associated with a registered system,

The largest number of companies subject to the Act as components of registered holding company systems at any one time was 1,620 in 1938. Altogether 2,419 companies have been subject to the Act as registered holding companies or subsidiaries thereof at one time oz another during the period from June 15, 1938, to June 30, 1962. Included in this total were 223 holding companies (holding companies and holding-operating companies), 1,040 electric and/or gas utility companies, and 1,156 nonutility enterprises. From June 15, 1938, to June 30, 1962, a total of 2,235 of these companies have been released from the regulatory jurisdiction of the Act or have ceased to exist as separate corporate entities. Of the remaining 184 companies, 162

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