[Federal Register Volume 60, Number 124 (Wednesday, June 28, 1995)]
[Proposed Rules]
[Pages 33640-33642]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15837]
Federal Register / Vol. 60, No. 124 / Wednesday, June 28, 1995 /
Proposed Rules
[[Page 33640]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 250
[Release No. 35-26312, File No. S7-11-95]
RIN 3235-AG45
Exemption of Issuance and Sale of Securities By Public-Utility
and Nonutility Subsidiary Companies of Registered Public-Utility
Holding Companies
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: The Commission, which today amended rules 45 and 52 under the
Public Utility Holding Company Act of 1935 (``Act''), is requesting
comment on further amendments. The proposed amendment to rule 52 would
permit a subsidiary company of a registered company to issue and sell
any security without the need to apply for, or receive, prior
Commission approval, where the conditions of the rule are met. The
Commission is proposing a conforming amendment to rule 45 with respect
to the guaranty of securities. These amendments are intended to
eliminate unnecessary regulatory burdens and paperwork associated with
seeking Commission approval for routine financings by companies in a
registered holding company system.
DATES: Comments must be submitted on or before September 26, 1995.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Mail Stop 6-9, Washington, D.C. 20549. Comment letters should
refer to File No. S7-11-95. All comment letters received will be
available for public inspection and copying in the Commission's Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.
FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate Director,
Joanne C. Rutkowski, Assistant Director, or Bonnie Wilkinson, Staff
Attorney, all at (202) 942-0545, Office of Public Utility Regulation,
Division of Investment Management, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is requesting comment on
proposed amendments to rules 45 and 52 (17 CFR 250.45 and 250.52) under
the Public Utility Holding Company Act of 1935 [15 U.S.C. 79 et seq.].
Rule 52 has exempted from the requirement of prior Commission approval
under section 6(a) the issuance and sale of certain specified types of
securities by any subsidiary company of a registered holding company,
in accordance with the terms and conditions of the rule. The proposed
amendment to rule 52 would broaden the scope of the rule to exempt all
types of securities issued and sold by such subsidiary companies,
subject to satisfying the other conditions of the rule. A conforming
change to rule 45 is also being proposed to conditionally exempt from
the requirement of prior Commission approval under section 12(b) any
guaranty by a subsidiary company of debt securities issued by any other
subsidiary company.
The Commission is also proposing to rescind the statements of
policy with respect to first mortgage bonds and preferred stock
(``Statements of Policy'') and seeks comment on this proposal.\1\
\1\ Holding Co. Act Release Nos. 13105 and 13106 (Feb. 16,
1956), as amended in Holding Co. Act Release Nos. 16369 (May 8,
1969) and 16758 (June 22, 1970).
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Introduction
Rule 52 exempts from the requirement of prior Commission
authorization under section 6(a) the issue and sale of certain
specified types of securities by both public-utility and nonutility
subsidiary companies of registered public-utility holding companies.\2\
Rule 52 also exempts from the requirement of prior Commission
authorization under section 9(a)(1) the acquisition by a company in a
registered holding company system of any securities issued by any
associate company pursuant to the rule.\3\
\2\ Section 6(a) requires Commission approval under the
standards of section 7 of the issue and sale of any security of a
registered holding company or its subsidiary company.
Section 6(b) authorizes the Commission to exempt from the
declaration requirements of section 6(a):
the issue or sale of any security by any subsidiary company of a
registered holding company, if the issue and sale of such security
are solely for the purpose of financing the business of such
subsidiary company and have been expressly authorized by the State
commission of the State in which such subsidiary company is
organized and doing business. * * *
In section 6(a), the Congress intended ``to exempt the issue of
securities by subsidiary companies in cases where holding company
abuses are unlikely to exist.'' H.R. Conf. Rep. No. 1903, 74th
Cong., 1st Sess. 66-67 (1935). See generally Holding Co. Act Release
No. 25058 (Mar. 9, 1990), 55 FR 11362 (Mar. 28, 1990) (adopting rule
52), and Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR
31120 (July 14, 1992) (amending rule 52).
\3\ Section 9(a)(1) requires prior Commission approval under the
standards of section 10 for the acquisition of securities by a
registered holding company or its subsidiary company. Section
9(c)(3) provides a limited exception from this requirement for the
acquisition of:
such commercial paper and other securities, within such
limitations, as the Commission may by rules and regulations or order
prescribe as appropriate in the ordinary course of business of a
registered holding company or subsidiary company thereof and as not
detrimental to the public interest or the interest of investors or
consumers.
The exemption under rule 52 does not apply to the issuance and
acquisition of securities to form a new subsidiary company of a
registered holding company.
Rule 52, as originally adopted in 1990, was limited to specified
types of securities issued by public-utility companies. The rule was
amended in 1992 to, among other things, expand the types of securities
within the exemption; 4 and the Commission has today further
amended the rule in order to expand the categories of securities
covered, to make the exemption more useful in connection with other
common forms of intrasystem financing, and to extend the exemption to
nonutility companies. As so amended, the rule provides a conditional
exemption from the requirement of prior Commission approval for the
issue and sale by both public-utility and nonutility subsidiary
companies of a registered holding company of any common stock,
preferred stock, bond, note or other form of indebtedness of which it
is the issuer (excluding guaranties), provided that, in the case of any
note issued to an associate company, the interest rate and maturity
date of such note are designed to parallel the effective cost of
capital of that associate company. To qualify for exemption under rule
52, the issue and sale must be solely for the purpose of financing the
business of the subsidiary company and, if the subsidiary company is a
public-utility company, must be expressly authorized by the relevant
state commission.
\4\ See fn. 2, supra.
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The Commission is today proposing a further amendment to rule 52 to
exempt the issue and sale of any security by a subsidiary company in a
registered holding company where the conditions of the rule are
otherwise met. This additional change is intended to eliminate unneeded
regulation of routine financings by existing subsidiaries of a
registered holding company. The Commission is also proposing a further
change to rule 45 to conform the exemption from section 12(b), which is
provided by rule 45, to the exemption from section 6(a), which is
provided by rule 52. Such a conforming amendment is necessary because a
guaranty may be both a security under section 6(a) and an extension of
credit under section 12(b).
The Commission is also proposing to rescind the Statements of
Policy. [[Page 33641]]
Discussion
In the 1992 release inviting comments on the proposed amendment to
rule 52, adopted today, the Commission requested comments on whether
the exemption under rule 52 should also be extended to exempt financing
transactions involving other securities, in particular guaranties of
debt securities issued by other subsidiary companies.
All of the registered holding companies commenting on the proposed
amendment 5 favored extending the exemption to other types of
securities, including guaranties. Guaranties by parent companies are
frequently used in conjunction with borrowings by their subsidiary
companies, and have been approved by order in countless
instances.6 Depending on materiality, such guaranties are required
to be disclosed in financial statements. Further, as several commenters
noted,7 guaranties of affiliate company obligations by public-
utility companies are subject to public utility commission approval in
many states.
\5\ The registered holding companies submitting comments were
American Electric Power Company, Inc. (``AEP''), Allegheny Power
System, Inc. (``APS''), Consolidated Natural Gas Company (``CNG''),
Central and South West Corporation, Eastern Utilities Associates,
General Public Utilities Corporation (``GPU''), and New England
Electric System.
\6\ See, e.g., Eastern Utilities Assocs., Holding Co. Act
Release No. 26266 (April 5, 1995)(guaranty by parent holding company
of obligations of nonutility subsidiary); American Electric Power
Co., Holding Co. Act Release No. 26267 (April 5, 1995)(same); Jersey
Central Power & Light Co., Holding Co. Act Release No. 26246 (March
6, 1995)(guaranty by utility of payment obligations on preferred
limited partnership interests of investment subsidiary); and
Southern Co., Holding Co. Act Release No. 26221 (Jan. 25,
1995)(guaranty by holding company of debt, lease obligations and
installment purchase obligations of nonutility subsidiary).
\7\ AEP 3 and GPU at 4.
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Several commenters 8 also supported expansion of rule 52 to
exempt other categories of securities, particularly in the context of
nonutility subsidiary financings. One holding company,9 for
example, noted the widespread use of partnership interests and other
types of securities in nonutility financing, particularly in the
context of project finance, and recommended the inclusion of such
securities in rule 52(b).10 The Commission is aware that a
majority of states now have adopted limited liability company statutes
which create a hybrid between partnerships and corporations.11
This is an increasingly popular form of business enterprise. Based upon
the Commission's experience in recent years with individual
applications, it is clear that the kinds and types of securities issued
by nonutility subsidiaries, including independent power subsidiaries,
tend to vary more than those issued by public-utility subsidiaries.
\8\ See generally AEP at 3, APS at 2, and CNG at 3.
\9\ GPU at 3.
\10\ Many of the nonutility investments approved by the
Commission in recent years have involved joint ventures with
nonassociate companies. It is almost always desirable for the joint
venture partners to invest directly or indirectly in an entity (such
as a partnership) which for federal and state income tax purposes is
treated as a partnership, rather than as a corporation, so that the
income, loss and credits associated with the business can be
reported directly by the joint venture partners.
\11\ We understand that limited liability companies may be
treated for tax purposes as partnerships, rather than taxed as
corporations.
The Commission is proposing to amend rule 52 to conditionally
exempt the issue and sale of all types of securities by public-utility
and nonutility subsidiaries alike. Because of the extensive reporting
requirements imposed by the Act and other federal securities laws, and
the far greater scrutiny of reporting companies since the passage of
the Act sixty years ago, the Commission believes that it may be
appropriate to condition the exemption under rule 52 solely by
reference to the literal requirements of section 6(b), without regard
to the form of the security issued.
In this connection, the Commission notes that it has exercised
jurisdiction under sections 6(a) and 7 of the Act over interest rate
swap agreements and related instruments.\12\ Comment is requested on
the extent, if any, to which such transactions should be excluded from
the rule proposed today.
\12\ These related instruments include products referred to as
interest rate caps, floors and collars. Registered holding companies
and subsidiaries have been using such instruments to limit the range
within which the interest rate on the debt underlying such
instrument will vary.
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The Commission is also considering whether compliance with rule
52(b)(2) \13\ should be required in situations where a nonutility
subsidiary of a registered holding company issues a security that is
acquired by another nonutility subsidiary in the same holding company
system. Comment is requested on whether rule 52(b)(2) should be amended
to create an exception for such situations.
\13\ Rule 52(b)(2) requires that the interest rate and maturity
date of a debt security issued by a nonutility company to an
associate company be designed to parallel the effective cost of
capital of the associate company.
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A guaranty of debt securities issued by another subsidiary company
is itself a security under the Act,\14\ the issuance and sale of which
is subject to the declaration requirement of section 6(a), unless
exempted under section 6(b). In addition, the guaranty by a subsidiary
company of any obligation of another subsidiary company is subject to
section 12(b) and rule 45(a) thereunder.\15\ An agreement to assume
joint liability, as co-maker or otherwise, with respect to the
indebtedness of another company is the functional equivalent of a
guaranty, and is also subject to both sections 6(a) and 12(b).
\14\ See Holding Company Act section 2(a)(16)(definition of
security), 15 U.S.C. 79b(a)(16).
\15\ Section 12(a) prohibits the guaranty by subsidiary
companies of debt issued by a registered holding company. 15 U.S.C.
79l(a).
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Rule 45(a), with exceptions not relevant here, prohibits the
issuance of guaranties and similar undertakings by a subsidiary company
without the filing of a declaration.\16\ We believe, however, that any
guaranty or similar undertaking with respect to the indebtedness of
another subsidiary company that is issued pursuant to the exemption
provided by rule 52 should itself be exempt under rule 45. Accordingly,
we are proposing to add a new paragraph to rule 45(b) to conform the
related exemptions.\17\
\16\ At present, rule 45(b)(6) exempts certain guaranties ``in
the ordinary course of business.'' The rule by its terms does not
apply to a guaranty of a subsidiary's indebtedness for borrowed
money.
\17\ Under our proposal, it is possible that a subsidiary
company providing a guaranty may be exempt from section 12(b) by
reason of the proposed amendment to rule 45, but fail to satisfy the
conditions for exemption from section 6(a) provided by rule 52.
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In connection with the amendments to rules 52 and 45 adopted today
by the Commission, some commenters have expressed concern that public-
utility subsidiaries of registered holding companies and their
customers need protection from the financial effects of financing
transactions, particularly in the context of nonutility ventures that
are not otherwise subject to effective state oversight.\18\ The
proposed expansion of the exemptions under rules 52 and 45 may heighten
these concerns, and the Commission seeks the views of all parties on
these issues. As a result, the Commission requests comments as to
whether protection is needed and, if so, what form it should take.
Commenters are invited to address the need for limitations based on (a)
the registered holding company system's capitalization ratios; (b) the
financial condition of the registered holding company system; (c) the
extent of past losses incurred by registered holding companies in
connection with past nonutility ventures; and (d) any other basis
specified by the commenter. The [[Page 33642]] Commission also seeks
comment on whether the rules should incorporate any requirements of
notice to interested state commissions of the consummation of financing
by nonutility subsidiaries of registered holding companies.
\18\ See the discussion of the comments of the City of New
Orleans in the companion release published today in the Federal
Register.
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The Commission also proposes to rescind the Statements of Policy.
The Statements of Policy were formulated by the Commission's staff
nearly forty years ago to specify the terms to be included in new
issues of first mortgage bonds and preferred stock. As the securities
markets have developed, the Commission has found that the Statements of
Policy have become anachronistic and hinder the ability of registered
companies to raise capital. As a result, the Commission has permitted
more and more deviations on a case-by-case basis from the requirements
of the Statements of Policy.19 In addition, in 1992, for similar
reasons, the Commission eliminated compliance with the Statements of
Policy as a condition to use of Rule 52.20 The Commission believes
that it is no longer appropriate to require specific terms to be
included in securities issues, and requests comment on this proposed
rescission.
\19\ See, e.g., Georgia Power Co., Holding Co. Act Release No.
25033 (Feb. 7, 1990)(authorizing deviation from redemption
provisions required by Statement of Policy for first mortgage
bonds), and System Energy Resources, Inc., Holding Co. Act Release
No. 24318 (Feb. 18, 1987) (authorizing charter amendment with
earnings coverage requirement different from Statement of Policy for
preferred stock). The Statements of Policy themselves contemplate
that ``deviations from these standards should be permitted in
appropriate cases.'' Holding Co. Act Release Nos. 13105 and 13106
(Feb. 16, 1956).
\20\ Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR
31120 (July 14, 1992).
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Conclusion
The Commission believes that the registered holding-company systems
should have a greater ability to engage in routine financings without
the regulatory burden of prior Commission authorization, and that this
may be done without jeopardizing the interests the Act is designed to
protect. The rule amendments proposed today are intended to accomplish
this purpose.
Regulatory Flexibility Act Certification
Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b), the Chairman of the Commission has certified that the
proposed amended rules will not, if adopted, have a significant
economic impact on a substantial number of small entities. This
certification, including the reasons therefor, may be obtained from
Bonnie Wilkinson, Office of Public Utility Regulation, Division of
Investment Management, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549.
Costs and Benefits
It appears that amended rules 45 and 52 will substantially decrease
regulatory compliance costs for the registered holding companies.
Paperwork Reduction Act
The proposed amendment is subject to the Paperwork Reduction Act of
1980 (44 U.S.C. 79 et seq.) and will be submitted to the Office of
Management and Budget for approval.
Statutory Authority
The Commission is proposing to amend rules 45 and 52 pursuant to
sections 6, 9, 12 and 20 of the Act.
List of Subjects in 17 CFR Part 250
Electric utilities, Holding companies, Natural gas, Reporting and
recordkeeping requirements, Securities.
Text of Proposed Rules
For the reasons set forth in the preamble, Part 250 of chapter II,
title 17, of the Code of Federal Regulations is proposed to be amended
as follows:
PART 250--GENERAL RULES AND REGULATIONS, PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935
1. The authority citation for part 250 continues to read as
follows.
Authority: 15 U.S.C. 79c, 79f(b), 79i(c)(3), 79t, unless
otherwise noted.
2. Section 250.45 is amended by adding paragraph (b)(7) to read as
follows:
Sec. 250.45 Loans, extensions of credit, donations and capital
contributions to associate companies.
* * * * *
(b) Exceptions. * * *
(7) An agreement by any subsidiary company of a registered holding
company to assume liability (as guarantor, co-maker, indemnitor, or
otherwise) with respect to any security issued by any other subsidiary
company in the same holding company system, provided that the issuance
and sale of such security is exempt from the declaration requirements
of section 6(a) of the Act (15 U.S.C. 79f(a)) pursuant to Sec. 250.52.
3. Section 250.52 is amended by revising paragraphs (a) and (b) to
read as follows:
Sec. 250.52 Exemption of issue and sale of certain securities.
(a) Any registered holding-company subsidiary which is itself a
public-utility company shall be exempt from section 6(a) of the Act (15
U.S.C. 79f(a)) and rules thereunder with respect to the issue and sale
of any security, of which it is the issuer if:
(1) The issue and sale of such security are solely for the purpose
of financing the business of such public-utility subsidiary company;
(2) The issue and sale of such security have been expressly
authorized by the state commission of the state in which such
subsidiary company is organized and doing business; and
(3) The interest rates and maturity dates of any debt security
issued to an associate company are designed to parallel the effective
cost of capital of that associate company.
(b) Any subsidiary of a registered holding company which is not a
holding company, a public-utility company, an investment company, or a
fiscal or financing agency of a holding company, a public-utility
company or an investment company shall be exempt from section 6(a) of
the Act (15 U.S.C. 79f(a)) and rules thereunder with respect to the
issue and sale of any security, of which it is the issuer if:
(1) The issue and sale of such security are solely for the purpose
of financing the existing business of such subsidiary company; and
(2) The interest rates and maturity dates of any debt security
issued to an associate company are designed to parallel the effective
cost of capital of that associate company.
* * * * *
Dated: June 20, 1995.
By the Commission.
Jonathan G. Katz,
Secretary.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-15837 Filed 6-27-95; 8:45 am]
BILLING CODE 8010-01-P