[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