[Federal Register Volume 63, Number 38 (Thursday, February 26, 1998)]
[Rules and Regulations]
[Pages 9736-9742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4855]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 250

[Release No. 35-26826, 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; Rescission of Statements of Policy

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission is amending rule 52 under the Public Utility 
Holding Company Act of 1935 (``Act'') to exempt from the requirement of 
prior Commission approval under the Act the issue and sale of any 
security by a subsidiary company in a registered holding company 
system, where the conditions of the rule are otherwise met. The 
Commission is also amending rule 45 under the Act to conform the 
exemption from section 12(b) of the Act, which is provided by rule 45, 
to the exemption from section 6(a), which is provided by rule 52. These 
amendments are intended to eliminate unnecessary regulatory and 
paperwork burdens associated with seeking Commission approval for 
routine financings by companies in registered holding company systems.

EFFECTIVE DATE: February 26, 1998.

FOR FURTHER INFORMATION CONTACT: Catherine A. Fisher, Assistant 
Director, or Martha Cathey Baker, Senior Special Counsel, 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: Subject to stated terms and conditions, rule 
52 (17 CFR 250.52) under the Act exempts from the requirement of prior 
Commission approval under section 6(a) of the Act the issuance and sale 
of certain specified types of securities by a subsidiary of a 
registered holding company. Rule 52 also exempts from the requirement 
of prior Commission authorization under section 9(a) of the Act the 
acquisition by a company in a registered holding company system of the 
securities issued by an associate company under the rule. The 
Commission is amending rule 52 to exempt all types of securities issued 
and sold by subsidiary companies, subject to the satisfaction of the 
other conditions of the rule. Additionally, the Commission is adopting 
a conforming change to rule 45 to 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, so 
long as the issuance of the guaranty and the underlying obligation are 
exempt under rule 52. The Commission is also rescinding the statements 
of policy with respect to first mortgage bonds and preferred stock 
(``Statements of Policy'').1 The Commission proposed these 
amendments and rescission of the Statements of Policy by release issued 
on June 20, 1995.2
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    \1\ The Statements of Policy were adopted by the Commission on 
February 16, 1956 (Holding Co. Act Release Nos. 13105 and 13106) and 
amended on May 8, 1969 and June 22, 1970 (Holding Co. Act Release 
Nos. 16369 and 16758, respectively).
    \2\ Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 
33640 (June 28, 1995) (``Proposing Release'').
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Discussion

    Rule 52 exempts from the requirement of prior Commission 
authorization under section 6(a) the issue and sale of certain types of 
securities by subsidiary companies of registered holding 
companies.3 The rule also exempts from the requirement of 
prior Commission authorization under section 9(a)(1) the acquisition by 
a company in a registered system of any securities issued by an 
associate company under the rule.4
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    \3\ Section 6(a) requires Commission approval under the 
standards of section 7 for 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 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, or if the issue and sale of such 
security are solely for the purpose of financing the business of 
such subsidiary company when such subsidiary company 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.
    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. 
19, 1990), 55 FR 11362 (Mar. 28, 1990) (adopting rule 52); Holding 
Co. Act Release No. 25573 (July 7, 1992), 57 FR 31120 (July 14, 
1992) (amending rule 52); and Holding Co. Act Release No. 26311 
(June 20, 1995), 60 FR 33634 (June 28, 1995) (further amending rule 
52).
    \4\ Section 9(a)(1) in pertinent part requires prior Commission 
approval under the standards of section 10 of the Act for an 
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 of 
securities to form a new subsidiary of a registered holding company. 
See rule 52(d).

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[[Page 9737]]

    At present, the rule provides a conditional exemption from the 
requirement of prior Commission approval only with respect to the issue 
and sale by public utility and certain nonutility subsidiaries of a 
registered holding company of any common stock, preferred stock, bond, 
note or other form of indebtedness. The issue and sale of the 
securities must be solely for the purpose of financing the business of 
the issuing subsidiary and, if the issuer is a public utility 
subsidiary, must be expressly authorized by the relevant state 
commission. If the issuing subsidiary is an ``energy-related company'' 
as defined in rule 58 under the Act, it is subject to additional 
limitations on the amount of securities it may issue to associate 
companies without Commission approval.5 Additionally, the 
interest rate and maturity date of any debt security issued to an 
associate company must be designed to parallel the effective cost of 
capital of that associate company. By its terms, rule 52 currently 
excludes ``any guaranty and other form of assumption of liability on 
the obligations of another'' from the exemption provided by the rule.
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    \5\ Rule 58, 17 CFR 150.58(a)(1), was proposed concurrently with 
the proposed amendments to rule 52 and rule 45 that are adopted 
today. Rule 58 provides that the acquisition by a company in a 
registered holding company system of securities of an energy-related 
company, as defined in the rule, does not require prior approval of 
the Commission, subject to certain conditions and subject to an 
aggregate investment limitation of the greater of $50 million or 15% 
of the consolidated capitalization of the registered holding 
company. When rule 58 was adopted, rules 52 and 45 were amended to 
conform the exemption for intrasystem financing by nonutility 
energy-related companies afforded by those rules to the investment 
limitations in rule 58. See Holding Co. Act Release No. 26667 (Feb. 
14, 1997), 62 FR 7900 (Feb. 20, 1997) (``Rule 58 Release'').
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    Rule 45 prohibits registered holding companies and their 
subsidiaries from extending credit to or indemnifying a company in the 
same holding company system, without filing a declaration and obtaining 
a Commission order.6 Rule 45(b) provides limited exceptions 
from the general provision.
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    \6\ Rule 45 was adopted under section 12(b), which provides 
that:
    It shall be unlawful for any registered holding company or 
subsidiary company thereof, by use of the mails or any means or 
instrumentality of interstate commerce, or otherwise, directly or 
indirectly, to lend or in any manner extend its credit to or 
indemnify any company in the same holding-company system in 
contravention of such rules and regulations or orders as the 
Commission deems necessary or appropriate in the public interest or 
for the protection of investors or consumers or to prevent the 
circumvention of the provisions of this title or the rules, 
regulations, or orders thereunder.
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    In the Proposing Release, the Commission proposed amendments that 
would (a) expand the exemption provided by rule 52 to cover all types 
of securities that may be issued by registered holding company 
subsidiaries, including guaranties; and (b) conform rule 45 to the 
proposed amendments to rule 52 so as conditionally to exempt from the 
requirement of prior Commission approval under section 12(b) any 
guaranty by a subsidiary company of securities issued by any other 
subsidiary company. The Commission also requested comment on the 
following issues: (a) Whether interest rate swap agreements and related 
instruments should be covered by rule 52; (b) whether compliance with 
rule 52(b)(2) 7 should be required where a nonutility 
subsidiary of a registered holding company issues a security to an 
associate nonutility company; (c) whether exemption of nonutility 
financing should be subject to other limitations based on, for example, 
capitalization ratios, financial condition, or past losses incurred in 
connection with nonutility ventures; (d) whether notice of financing 
transactions by nonutility companies should be required to be submitted 
to interested state commissions; and (e) whether the Statements of 
Policy should be rescinded.
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    \7\ 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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    The Commission received comments submitted by seven registered 
holding companies,8 Wisconsin Energy Corporation 
(``WEC''),9 the American Gas Association (``AGA'' and, 
together with the registered holding companies and WEC, ``Industry 
Commenters''), and the Council of the City of New Orleans (``New 
Orleans''). The Industry Commenters generally support adoption of the 
proposed amendments, which they state would: (a) Reduce unnecessary 
delays and burdensome administrative costs; 10 (b) provide 
necessary flexibility to respond to rapidly changing market 
opportunities and unforeseen events; 11 and (c) improve 
registered holding companies' competitive position relative to non-
registered holding companies.12
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    \8\ The registered holding companies submitting comments were 
American Electric Power Company, Inc. (``AEP''), Allegheny Power 
System, Inc. (``Allegheny''), Consolidated Natural Gas Company 
(``Consolidated''), The Columbia Gas System, Inc. (now Columbia 
Energy Group) (``Columbia''), General Public Utilities Corporation 
(now GPU, Inc.) (``GPU''), Northeast Utilities (``Northeast'') and 
The Southern Company (``Southern'').
    \9\ WEC is an exempt holding company under section 3(a)(1) of 
the Act.
    \10\ Comments of Allegheny, AGA, AEP, Columbia and Southern.
    \11\ Comments of AEP, AGA, GPU, Northeast and WEC.
    \12\ Comments of AEP, AGA, GPU, Northeast and WEC.
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    New Orleans opposes adoption of the proposed amendments. New 
Orleans states that the proposed amendments would permit system 
companies to proceed ``in an unregulated environment,'' since ``state 
commissions may have limits on their authority to act.'' 13 
New Orleans further states that the amendments, together with then-
proposed rule 58, are ``unlawful,'' and goes on to state that the 
amendments ``do not possess the strong factual basis necessary to 
support the conclusion that no abuses will occur if [they] are 
implemented.'' 14 New Orleans asks that the Commission 
either abandon the proposed amendments, reissue them for further 
comments, or modify them to reflect the Congressional intent that the 
Commission be responsible for the protection of consumers through 
review of registered holding company system financings.
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    \13\ Comments of New Orleans.
    \14\ Id.
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    A discussion follows of the principal features of the proposed 
amendments, the specific issues on which the Commission requested 
comment in the Proposing Release, and other issues raised by 
commenters.

1. Expansion of Types of Securities Exempt Under Rule 52

    As originally adopted, rule 52 exempted the issue and sale of 
common stock, preferred stock, first mortgage bonds, and general and 
refunding mortgage bonds by public utility subsidiaries of registered 
holding companies, subject to various conditions.15 In 1992, 
the rule was amended to cover all types of mortgage bonds and 
notes.16 Further amendments to rule 52 in 1995 (``1995 
Amendments'') 17 broadened the types of securities that may 
be issued by public utility subsidiaries to include all

[[Page 9738]]

debt securities 18 and expanded the exemption to allow 
nonutility subsidiaries to issue the securities under the rule. In the 
Proposing Release, the Commission requested comment on further 
expansion of rule 52 to include within its exemption all types of 
securities issued by subsidiaries of registered holding companies, 
subject to satisfaction of the other conditions of the rule.
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    \15\ Holding Co. Act Release No. 25058 (Mar. 19, 1990), 55 FR 
11362 (Mar. 28, 1990).
    \16\ Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR 
31120 (July 14, 1992).
    \17\ Holding Co. Act Release No. 26311 (June 20, 1995), 60 FR 
33634 (June 28, 1995).
    \18\ The 1995 Amendments specifically excluded guaranties from 
the scope of rule 52, and the issue of whether guaranties should be 
exempt was reproposed for consideration and comment in the broader 
context of extending the rule to cover all securities. The subject 
of guaranties is discussed below.
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    The Industry Commenters support expanding the types of securities 
covered by the exemption, because the expansion gives companies in 
registered holding company systems the flexibility to raise capital at 
the lowest possible cost, regardless of the form of security being 
issued, just as their competitors do.19 In addition to its 
more general objections to the proposed amendments, New Orleans is 
concerned that the amendments will ``facilitate more complex forms of 
financings of nonutility businesses,'' without any state or federal 
review of the attendant risks.
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    \19\ See, e.g., comments of Consolidated, GPU and WEC.
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    In adopting the 1995 Amendments and expanding the exemption under 
rule 52 to all debt securities, the Commission noted that rule 52, in 
its then-current form, was of limited use.20 The Commission 
stated that permitting utility subsidiaries to issue all types of debt 
securities under the rule was ``appropriate in view of the continuing 
requirement of express approval by the [relevant] state commission * * 
*.'' 21 With respect to the issuance by nonutility 
subsidiaries of securities, the Commission stated that requiring prior 
Commission approval was ``no longer necessary'' in view of the 
extensive reporting requirements required by the Act and other federal 
securities laws and the level of scrutiny applied to issuances by 
investors and the financial community.22
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    \20\ 60 FR at 33635. For example, the issuance by public utility 
subsidiary of a registered holding company of a debt instrument 
other than a mortgage bond or note required prior Commission 
approval, whether or not such issuance had been explicitly approved 
by a state commission.
    \21\ 60 FR at 33635.
    \22\ 60 FR at 33636.
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    For similar reasons, the Commission believes it is appropriate to 
expand the exemption provided by rule 52 to include all types of 
securities.23 In the case of public utility subsidiaries, 
the exemption will continue to be available only if the appropriate 
state commission has expressly approved the issue and sale and, in this 
case, any further review by the Commission would only duplicate efforts 
and unnecessarily delay financing activities. In the case of both 
public utility and other subsidiaries, the exemption will be available 
only if the proceeds are used in connection with an existing business. 
Thus, absent another available exemption, the Commission will continue 
to review any financing the proceeds of which are used to enter into a 
new business endeavor, to determine if the standards of the Act have 
been satisfied. In addition, the Commission will retain jurisdiction 
over the financing activities of the registered holding company, 
including any guaranty of obligations of its subsidiaries.
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    \23\ As amended, rule 52 will exempt the issue of guaranties and 
certain interest rate swap agreements (see the separate discussions 
of guaranties and derivative instruments below). GPU specifically 
suggests that partnership and other similar types of interests are a 
common vehicle for nonutility subsidiary financing and should be 
exempt under the rule. The Commission's view is that such interests 
are similar to the types of instruments covered by the definition of 
a security in section 2(a)(16) of the Act and therefore should be 
included in the coverage of the rule.
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2. Guaranties

    Rule 52, in its current form, does not extend to guaranties. The 
Commission sought comment in 1992 on whether guaranties should be 
afforded an exemption under the rule, but declined to modify the rule 
in this respect in the 1995 Amendments.24 The Proposing 
Release again requested comment on whether guaranties should be 
afforded an exemption under the rule.
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    \24\ 60 FR at 33635, n.10.
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    A guaranty of debt securities issued by another subsidiary company 
is itself a security under the Act,25 the issuance and sale 
of which are 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).26 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).
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    \25\ Section 2(a)(16) of the Act (definition of security).
    \26\ Section 12(a) of the Act prohibits the guaranty by 
subsidiary companies of debt issued by a registered holding company.
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    The Industry Commenters support the proposal to include guaranties 
and other assumptions of liability in rule 52's exemption.27 
New Orleans opposes extending the exemption in this respect, stating 
that the proposed rule changes ``will make it difficult to determine 
the level of corporate financial exposure and the degree of risk 
associated with nonutility ventures.'' 28 As New Orleans 
itself notes, however, the rule would preclude utility subsidiaries 
from assuming liability without state commission 
authorization.29 Also, as AEP notes, the risks of nonutility 
subsidiary activities are imposed on utility associates through the 
holding company, and the Commission retains its jurisdiction over the 
exposure of the holding company to these activities.30
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    \27\ Comments of Allegheny, Northeast and WEC.
    \28\ Comments of New Orleans.
    \29\ Id.
    \30\ Comments of AEP.
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    The reasons stated above for extending rule 52 to all types of 
securities apply equally to extending the rule's coverage to 
guaranties. Under the conditions provided in rule 52, the Commission 
believes it appropriate to exempt guaranties and other assumptions of 
liabilities from the prior approval requirements of section 6(a).
    Rule 45(a), with exceptions not relevant here, also prohibits the 
issuance of guaranties and similar undertakings by a subsidiary company 
without the filing of a declaration.31 A guaranty may be 
both a security under section 6(a) and an extension of credit under 
section 12(b). The Commission's view is that any guaranty or similar 
undertaking should be exempt under rule 45, if the guaranty is itself 
exempt under rule 52 and it is issued with respect to the security of 
another subsidiary company that is likewise exempt under rule 52. 
Otherwise, rule 52 would not effectively exempt the issuance of the 
guaranty from the requirement of prior Commission approval. 
Accordingly, the Commission is adopting the proposed amendment to rule 
45(b), in substantially the form proposed,32 to conform the 
related exemptions.
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    \31\ 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.
    \32\ Minor revisions have been made in the rule as adopted, to 
clarify that the assumption of liability must be exempt under rule 
52 in order for it to be exempt under rule 45(b)(7).
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3. Interest Rate Swaps and Similar Arrangements

    In the Proposing Release, the Commission noted that it has 
exercised jurisdiction under sections 6(a) and 7 of the Act over 
interest rate swap

[[Page 9739]]

agreements 33 and related instruments,34 and 
requested comment on the extent, if any, to which these transactions 
should be exempt from prior Commission approval under rule 52. All 
commenters that addressed this issue support exempting swaps under rule 
52.35 Also, Northeast requested that the Commission clarify 
the basis of its jurisdiction over these transactions and Southern 
requested that registered holding companies ``be given a fuller 
opportunity to address the legal basis'' on which jurisdiction rests.
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    \33\ See, e.g., South West Electric Power Co., Holding Co. Act 
Release No. 25755 (March 5, 1993); Consolidated Natural Gas Co., 
Holding Co. Act Release No. 25651 (Oct. 8, 1992); General Public 
Utilities Corp., Holding Co. Act Release No. 25625 (Sept. 10, 1992); 
New England Power Co., Holding Co. Act Release No. 25592 (July 30, 
1992); New England Energy Inc., Holding Co. Act Release No. 25378 
(Sept. 19, 1991); Northeast Utilities, Holding Co. Act Release No. 
25221 (Dec. 21, 1990); and Georgia Power Co., Holding Co. Act 
Release No. 25197 (Nov. 30, 1990).
    \34\ These related instruments include products referred to as 
interest rate caps, floors and collars.
    \35\ Comments of AGA, Columbia, GPU, Northeast and Southern.
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    The types of derivative transactions over which the Commission has 
taken jurisdiction under sections 6(a) and 7 of the Act are swaps that 
are tied to the interest or dividend rate on a bond, share of preferred 
stock, or other security issued by a company in a registered holding 
company system. These types of derivative transactions are typically 
entered into as a means of reducing the company's capital costs, by 
trading the interest or dividend rate on an outstanding security for an 
interest or dividend rate based on current or expected market changes. 
In entering into the swap transaction, the company accomplishes the 
same result as it would by issuing a new security bearing the current 
interest or dividend rate and using the proceeds to refund the 
outstanding one, without incurring the accompanying issuance costs.
    In these limited circumstances, entry into a derivative transaction 
is the functional equivalent of issuing a new security. As a result, it 
is consistent with the underlying principles of the Act and the 
provisions of section 6(b) to exempt these limited types of swaps from 
the requirement of prior Commission review.36 Provided that 
the other conditions of the rule are satisfied,37 the types 
of derivative transactions entered into by registered system companies 
to manage the capital costs associated with their own obligations will 
be afforded the exemption of rule 52.
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    \36\ Alternatively, this type of derivative transaction can be 
viewed as a change in the terms of an existing security.
    \37\ In the case of public utility subsidiaries of registered 
holding companies, state commission approval of entry into the 
derivative will be required in order to qualify for exemption under 
rule 52(a).
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    Entry by a company in a registered holding company system into 
derivative transactions not related to outstanding obligations of the 
company are not intended to be exempted by rule 52. Further, the fact 
that the limited types of derivative transactions described above are 
afforded the exemption of the rule is not intended to indicate any 
position on the issue of whether swaps and other types of derivative 
instruments would be deemed to be securities for other purposes under 
the Act, or under the other federal securities laws.38
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    \38\ In general, whether a derivative instrument will be 
determined to be a security under the federal securities laws 
depends on a number of factors, including the terms of the 
instrument and the manner in which it is marketed and sold. See In 
re BT Securities Corp., Securities Exchange Act Release No. 35136 
(Dec. 22, 1994).
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4. Additional Conditions to Exemption

    In the Proposing Release, the Commission noted concerns that public 
utility subsidiaries of registered holding companies and their 
customers may need protection from the financial effects of financing 
transactions, particularly in connection with nonutility financing that 
is not subject to state oversight. Comment was sought on whether 
additional conditions to exemption should be imposed, in the form of 
limitations based on capitalization ratios, financial condition, past 
losses in connection with nonutility ventures, or any other 
basis.39
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    \39\ 60 FR at 33641.
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    The Industry Commenters uniformly state that no additional 
conditions are needed.40 However, New Orleans states that, 
if the proposed amendments to rules 52 and 45 are not rejected, 
additional conditions are necessary to facilitate an accurate 
determination of the capital structure of public utility subsidiaries 
and, in turn, the cost of capital of those subsidiaries. Specifically, 
New Orleans asks the Commission (a) to assure that both the FERC and 
state commissions have access to the books and records of all 
registered holding company affiliates and audit authority sufficient to 
preclude cross-subsidization; and (b) to establish cost allocation 
rules.41 Additionally, New Orleans requests that these 
conditions should include an ``affirmative evaluation of the effects of 
additional affiliate investments on a utility's cost of capital, 
capital structure, cost of debt, and debt ratings.'' 42
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    \40\ See, e.g., comments of AEP, AGA, Allegheny, Columbia, 
Consolidated, GPU, Northeast and Southern. These commenters, in 
support of this view, cite protections provided by: continuing 
Commission review of holding company financings; state commission 
review of utility financings; powers of the Federal Energy 
Regulatory Commission (``FERC'') and state commissions to protect 
ratepayers in the context of ratemaking; safeguards inherent in the 
financial markets, including those provided by ratings agencies and 
securities exchanges; protection of investors through the other 
securities laws; the routine nature of the transactions that would 
be exempted; and the limitation on intrasystem ``energy-related'' 
subsidiary financings in rule 58.
    \41\ Comments of New Orleans.
    \42\ Id.
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    With respect to the suggestions of New Orleans concerning access to 
information, the Commission notes that it maintains an ongoing effort 
to assure that the FERC and relevant state commissions are afforded the 
opportunity to review relevant information provided to the Commission 
on various transactions subject to its jurisdiction. Also, as discussed 
below, the Commission is adopting a requirement that registered holding 
companies provide notice of certain nonutility financings to state 
commissions having jurisdiction over the rates charged by the utility 
associates of the subsidiaries.43
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    \43\ In addition, as provided in the Rule 58 Release, each 
registered holding company is required to provide on Form U-9C-3 
extensive financial information to the Commission on investments in 
nonutility ventures that are exempted from prior Commission approval 
under rule 58. A copy of that information is required to be filed 
with each state commission having jurisdiction over the rates 
charged by the public utility subsidiaries of the registered holding 
company in question.
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    Regarding the request by New Orleans for cost allocation rules, the 
Commission notes that the exemption afforded by rule 52 with respect to 
intrasystem financings is conditioned on the use of terms that parallel 
the effective cost of capital of the associate company lender. This 
provision should serve to avoid any material cross-subsidization of 
nonutility companies at the expense of public utility subsidiaries and 
their ratepayers.
    The Commission appreciates the need of state commissions to 
evaluate the effects of investments by a registered holding company in 
nonutility associates on the cost of capital of a jurisdictional 
utility associate. However, the Commission believes that the reporting 
requirements of rule 52, as currently in effect and as amended today, 
will assist state commissions in guarding against improper increases in 
the cost of capital as a result of any nonutility financing 
transactions that directly affect their utility constituents. The 
Commission agrees with the arguments advanced by the Industry

[[Page 9740]]

Commenters in this regard, and concludes that it is unnecessary to 
impose additional conditions on the use of the exemption as proposed.

5. Need for ``Mirror Image'' Requirement in Nonutility Financing 
Transactions

    In the Proposing Release, the Commission requested comment on the 
question of whether compliance with rule 52(b)(2) 44 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. All Industry 
Commenters addressing this issue support an exception from the ``mirror 
image'' requirement of subsection (b)(2) for this type of transaction, 
taking the position that financings solely between nonutility 
associates of a registered holding company pose no risk of cross-
subsidization or other issues of protection of ratepayers.45 
The Commission agrees that, absent a guaranty or other involvement by 
the holding company or its public utility subsidiaries, the costs of 
these transactions are unlikely to have a direct effect on ratepayers. 
There is some concern, however, that public utility subsidiaries that 
have transactional relationships with these nonutility associates may 
be burdened with financing costs indirectly, and thus adversely 
affected by the terms of the transactions.46 Accordingly, 
the Commission has determined to defer action on the issue and study it 
further.
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    \44\ 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.
    \45\ Comments of Consolidated, GPU, Southern and WEC.
    \46\ See also comments of Consolidated (suggesting that consumer 
interests may be implicated where the financing involves funds 
``directly traceable back to the holding company financings'').
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6. Notice of Nonutility Financings to State Commissions

    The Commission recognizes the need of state commissions, in 
connection with carrying out their regulatory functions, for 
information concerning financing transactions involving public utility 
companies subject to their jurisdiction and other companies 
(particularly nonutility companies) in the same holding company system. 
As a result, the Commission also sought comment in the Proposing 
Release 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.
    New Orleans supports additional disclosure of nonutility 
financings, stating that information on associate company financing 
would be appropriate ``to ascertain any at risk companies.'' All 
Industry Commenters who responded on this issue oppose notifying state 
commissions of nonutility financings. According to these parties, 
notices would be unnecessary because state commissions (a) can protect 
ratepayers through ratemaking proceedings and review of affiliate 
transactions 47 and (b) already receive ``sufficient 
information on the financial health of their jurisdictional 
utilities.'' 48 Additionally, two of the Industry Commenters 
assert that public disclosure could harm legitimate competitive and 
commercial interests.49 These commenters recommend that, if 
any disclosure is required, it be (a) limited to information on sales 
of securities to affiliates and (b) provided on the Form U-9C-3 that is 
required in connection with rule 58.50
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    \47\ Comments of Consolidated and Columbia.
    \48\ Comments of Columbia.
    \49\ Comments of Allegheny and Southern.
    \50\ See the Rule 58 Release. The Commission notes that there is 
some duplication of information between Form U-6B-2 and Form U-9C-3 
with respect to reporting financing transactions for energy-related 
and gas-related companies. Form U-9C-3, however, includes only 
information relating to these types of companies, not all nonutility 
subsidiaries of registered holding companies. As a result, it is not 
an appropriate mechanism for reporting many transactions that are 
exempt under rule 52.
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    The Commission has previously noted that the ability of state 
commissions to obtain information about registered holding company 
activities varies greatly from state to state.51 The need of 
state commissions having retail rate jurisdiction over public utility 
companies for information regarding financing activities of nonutility 
associate companies of those utility companies, and their potential 
inability to obtain this information, must be carefully considered.
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    \51\ See The Regulation of Public-Utility Holding Companies, 
Report of the Division of Investment Management, Securities and 
Exchange Commission (June 1995) (``Report''), at 134-36.
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    The Commission believes that delivery to interested state 
commissions of only the financing information that will have a direct 
bearing on their jurisdictional public utility companies should be 
required. Rule 52, as amended today, includes a requirement that copies 
of each Form U-6B-2 that is filed with the Commission to report an 
issue of securities by a nonutility company, and the related 
acquisition by an associate public utility company, must be submitted 
to each state commission having jurisdiction over the retail rates of 
the public utility company.52
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    \52\ The information on financing transactions contained in Form 
U-6B-2 is necessarily narrow and relates only to the financing 
activities of nonutility associate companies. The Commission notes, 
however, that extensive information on investments in nonutility 
companies under rule 58 is required to be delivered to interested 
state commissions. Also, information concerning registered holding 
company investments in exempt wholesale generators and foreign 
utility companies is required to be submitted to state commissions 
pursuant to rule 53. The Commission believes that the aggregation of 
this information should assist state commissions in the performance 
of their regulatory duties, and directs the Commission staff to 
coordinate with state commissions to assure that the information 
provided to them is sufficient for this purpose.
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7. Statements of Policy

    In the Proposing Release, the Commission noted that the Statements 
of Policy, promulgated nearly forty years ago to specify the terms to 
be included in new issues of first mortgage bonds and preferred stock, 
have not kept pace with changes in the securities markets and hinder 
the ability of registered companies to raise capital.53 The 
proposal to rescind the Statements of Policy met with no opposition 
from any of the parties submitting comments. For the reasons outlined 
above and in the Proposing Release, the Commission is rescinding the 
Statements of Policy.
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    \53\ See Report at 51.
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8. Other Comments

    Some Industry Commenters note that rule 42 requires prior 
Commission approval for intrasystem redemption of securities, 
notwithstanding that the issuance of these securities could be exempt 
from prior Commission review under proposed rule 52.54 These 
registered holding companies request that rule 42 be amended so that 
security acquisitions, retirements and redemptions will be exempt from 
review to the extent the issuance of those securities was exempt under 
rule 52. While this type of transaction among associate companies 
raises cross-subsidization issues, the suggestion regarding rule 42 
warrants further consideration, particularly in connection with 
transactions among nonutilities. The Commission anticipates addressing 
this issue at a later date.
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    \54\ Comments of Allegheny, Northeast, and Southern.
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Conclusion

    The Commission has carefully reviewed the proposed amendments to 
rules 52 and 45 in light of the comments received, and has concluded 
that the proposed amendments are lawful. As amended, rule 52 retains 
the

[[Page 9741]]

requirement that security issuances by utility subsidiaries (including 
guaranties of obligations of associate companies) be explicitly 
approved by the state commission having authority over the rates of 
that utility.55 Further, the Commission will continue to 
have jurisdiction to review entry into new nonutility businesses under 
sections 9(a) and 10 and any related financing of these 
businesses.56 In the course of the reviews, interested 
parties may express their views on the impact of the investments on 
consumers. As a further protection, both utility and nonutility 
financing activities remain subject to the ongoing reporting and 
auditing provisions of the Act. In light of these factors, and 
considering the need for companies in registered holding company 
systems to respond to market opportunities in a rapidly changing 
competitive environment,57 the Commission finds that a case-
by-case review of the issuance of any type of security by subsidiaries 
of registered holding companies is no longer necessary in the public 
interest or for the protection of investors or consumers.
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    \55\ Columbia requests that the Commission consider not 
requiring express approval of a security issuance by the relevant 
state commission where state law exempts the issuance from the need 
for approval. As stated in the release adopting the 1995 Amendments, 
it appears that section 6(b) does not offer a basis for this action. 
60 FR at 33635.
    \56\ Entry into many of these new businesses will require case-
by-case review and separate Commission authorization. As noted 
above, however, the Commission recently adopted rule 58, which 
exempts investment in some new business activities from the 
requirement of prior Commission review. The Commission has 
determined, as discussed in the Rule 58 Release, that the activities 
covered by rule 58 are so closely related to the utility business, 
that case-by-case review of these investments is no longer required 
in order to find that the standards of the Act are met.
    \57\ Noting that certain securities, such as partnership 
interests, are ``commonplace in the financing of non-utility * * * 
projects,'' GPU states that having the same ability as non-
registered holding company associates to engage in such financings 
is ``crucial'' to the ability of registered holding company systems 
to remain competitive. Comments of GPU.
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    The Commission believes that subsidiaries of registered holding 
companies should be able to engage in routine financings without the 
regulatory burden of prior Commission authorization where possible 
without jeopardizing the interests the Act is designed to protect. The 
rule amendments adopted today are consistent with this objective.
    These amended rules are not ``major rules'' within the meaning of 5 
U.S.C. 801 et seq. They are substantive rules that grant an exemption 
or relieve restrictions, within the meaning of 5 U.S.C. 553(d)(1), and 
therefore may become effective immediately.

Regulatory Flexibility Act Certification

    Under section 605(b) of the Regulatory Flexibility Act, the 
Chairman of the Commission has certified as follows:
    I, Arthur Levitt, Chairman of the Securities and Exchange 
Commission, hereby certify pursuant to 5 U.S.C. 605(b) that proposed 
amendments to rules 45 and 52 under the Public Utility Holding Company 
Act of 1935, as amended [15 U.S.C. 79 et seq.], together concerning the 
sale of securities by a subsidiary of a registered holding company, 
without a filing requirement, will not have a significant impact on a 
substantial number of small businesses. The reason for this 
certification is that it does not appear that any small businesses 
would be affected by the proposed rule amendments.

    Dated: June 19, 1995.
Arthur Levitt,
Chairman.

    The Commission did not receive any comments with respect to the 
Chairman's certification.

Costs and Benefits

    Amended rule 52 will substantially decrease regulatory compliance 
costs for the registered holding companies. There were 150 applications 
filed in calendar year 1996 by companies in registered holding company 
systems; in approximately 35 of these applications, specific requests 
for financing authorization would not have been filed, had the proposed 
amended rule 52 been in place. Estimated savings per application would 
have been approximately $20,000 per application, and related legal, 
accounting, and management costs. Thus, for 35 applications filed in 
calendar year 1996, the aggregate savings would have been approximately 
$700,000. Moreover, the reduction in Commission staff hours associated 
with reviewing and analyzing these applications would have been 
approximately 1,250 hours per year (approximately \1/2\ staff year). 
The only cost to the registered holding companies in complying with the 
amended rule will be the cost of completing a Form U-6B-2 after the 
issue or sale of any security under the rule. It is estimated that 
approximately one hour will be required to complete each form at an 
estimated cost of $100 per hour. Assuming 35 financing applications per 
year, the cost of compliance reporting would approximate $3,500 per 
year.

Paperwork Reduction Act

    These rules are subject to the Paperwork Reduction Act of 1980 (44 
U.S.C. 3501 et seq.) and have been submitted to the Office of 
Management and Budget for approval to use them through September 30, 
1998.

Statutory Authority

    The Commission is amending rules 45 and 52 under sections 6, 9, 12 
and 20 of the Public Utility Holding Company Act of 1935.

List of Subjects in 17 CFR Part 250

    Electric utilities, Holding companies, Natural gas, Reporting and 
recordkeeping requirements, Securities.

Text of Final Rules

    For the reasons set forth in the preamble, part 250 of chapter II, 
title 17, of the Code of Federal Regulations is 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, and such assumption of liability 
constitutes the issuance of a security that is exempt, from the 
declaration requirements of section 6(a) of the Act (15 U.S.C. 79f(a)) 
under Sec. 250.52.
* * * * *
    3. Section 250.52 is amended by revising paragraphs (a) and (b), 
and by adding paragraph (e), 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:

[[Page 9742]]

    (1) The issue and sale of the security are solely for the purpose 
of financing the business of the public-utility subsidiary company;
    (2) The issue and sale of the security have been expressly 
authorized by the state commission of the state in which the 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 related rules with respect to the issue 
and sale of any security of which it is the issuer if:
    (1) The issue and sale of the security are solely for the purpose 
of financing the existing business of the 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; Provided, That any security 
issued to an associate company by any energy-related company 
subsidiary, as defined in Sec. 250.58, shall not be exempt under these 
provisions unless, after giving effect to the issue of the security, 
the aggregate investment by a registered holding company or its 
subsidiary in the energy-related company subsidiary and all other 
energy-related company subsidiaries does not exceed the limitation in 
Sec. 250.58(a)(1).
* * * * *
    (e) A copy of any Certificate of Notification on Form U-6B-2 
(Sec. 259.206) that is filed with this Commission under this section 
with respect to any security issued by a subsidiary of a registered 
holding company under paragraph (b) of this section and acquired by a 
public-utility company that is an associate company of the issuer, 
shall be submitted concurrently to each state commission having 
jurisdiction over the retail rates of the public-utility company.

    Dated: February 20, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4855 Filed 2-25-98; 8:45 am]
BILLING CODE 8010-01-P