Our concern is not as to the effect of the amendment on Alleghany Corp., but as to the effect on the New York Central Railroad Co. and its system companies. It is this latter effect which prompts this

statement.

The New York Central Railroad Co. is the parent carrier of a system of companies primarily engaged in the transportation business and not in the business of investing, reinvesting, owning, holding, or trading in securities. The proposed amendment would not subject the New York Central Railroad Co. or any of the companies in its system to regulation under the Investment Company Act as an investment company. However, the New York Central and, through it, its system companies are controlled by Alleghany Corp. and if, through the proposed amendment, Alleghany is brought within the Investment Company Act, the Securities and Exchange Commission would have the power under section 17 of that act, to regulate transactions involving members of the Central system and other affiliated carriers which are already subject to regulation by the Interstate Commerce Commission.

In its memorandum in support of section 7, the Securities and Exchange Commission names Alleghany Corp. "as the most significant case in point." There seems no doubt, therefore, that if section 7 becomes law, the Securities and Exchange Commission would make the necessary findings and order to subject Alleghany Corp. to the Investment Company Act.

Section 17 of the Investment Company Act places restrictions upon, and grants the power to the Securities and Exchange Commission to regulate, various interaffiliate transactions, i.e., transactions involving, on the one hand, companies controlled by a registered investment company (in addition to the registered company itself and its promoters or underwriters), and, on the other hand, persons affiliated with the investment company or affiliated persons of such persons. The breadth of this power to regulate can be measured by the persons it can reach; its depth, by the transactions it covers.

First, as to the controlled companies, Alleghany controls Central through the control of 17.5 percent of the voting power of its outstanding stock and as the result of a proxy fight in 1954. The Interstate Commerce Commission has found that such control exists and there is no doubt that Central would be found to be a controlled company within the meaning of the Investment Company Act.

The New York Central System is made up of more than 50 carriers subject to the Interstate Commerce Act. Some of those carriers are jointly controlled with other railroads, but 31 are controlled solely by the Central and thus indirectly by Alleghany. For example, one of those controlled subsidiaries is the Pittsburgh & Lake Erie Railroad Co., a class I railroad which in 1958 had gross revenues of $31,242,074. These carriers would also be companies controlled by Alleghany Corps. within the meaning of the Investment Company Act. The carriers thus controlled by Central & Alleghany would in each case also be persons affiliated with Alleghany. There are in addition 31 carriers affiliated with Central through stock owned by Central which, through Alleghany's control of Central, are persons affiliated with Alleghany. Included within those companies are such wellknown companies as Railway Express Agency, Inc., the Pullman Co.,

the Reading Co., Delaware, Lackawanna & Western Railroad Co., and the Illinois Terminal Railroad Co.

The third class of affiliated companies of a company affiliated with Alleghany would be a long list including the major railroads of the United States. Joint ownership of terminal or switching carriers is commonplace in the railroad industry. For instance, the stock of the Illinois Terminal Railroad Co. is owned in equal shares by 11 class I railroads. Each of the 11 carriers, 1 of which is the New York Central, owns one-eleventh of the company. Inasmuch as the Ilinois Terminal Railroad Co. is an affiliate of Alleghany within the meaning of the Investment Company Act, each of the other 10 railroads are affiliated persons of that affiliate. The 10 railroads are: Illinois Central; Wabash; Baltimore & Ohio; Chicago & Eastern Illinois; Chicago, Burlington & Quincy; Chicago, Rock Island & Pacific; Gulf, Mobile & Ohio; Litchfield & Madison; New York, Chicago & St. Louis; and St. Louis & San Francisco.

The Sante Fe, Southern Pacific, Pennsylvania, Erie, Lehigh Valley, New Haven, Union Pacific, Northwestern, Milwaukee, Missouri Pacific, Southern, Louisville & Nashville, and others could be added to the list in the same manner. The large number of railroads, the transactions of which could be reached with the regulatory power under section 17, illustrates the breadth of that power.

I do not mean to imply that the transactions of the Central would come within the interaffiliate power of the SEC only in connection with these large carriers that I have named. The carriers in the Central system itself engage in transactions daily of the type common in the railroad industry, with the New York Central. The everyday transactions and arrangements between carriers of the railroads of the United States also occur between carriers within the New York Central system itself.

The scope of the transactions which could be regulated under section 17 is just as broad. Under paragraph (a) none of the carriers I have mentioned or any company in the New York Central system could sell to or purchase from the New York Central Railroad Co., or a company controlled by it, any property, except certain securities, unless the Securities and Exchange Commission approved such transaction upon application and after evidence. If Central is subjected to section 17, it would mean that without such approval the New York Central could not purchase the assets of one of its subsidiary carriers to effectuate a corporate simplification without SEC, a transaction which, of course, would also have to be approved by the Interstate Commerce Commission. Similarly, without SEC blessing, it would be unlawful to have sales or purchases of new or used engines, cars, equipment, rails, or other railroad property, including branch lines or spur lines, even though, insofar as the property involved was property used for transportation purposes, it would require the approval of the Interstate Commerce Commission under section 5 of the Interstate Commerce Act. These are not isolated examples. Carriers frequently purchase properties from one another. The sale of property between members of the Central system is an ordinary occurrence. But this power to regulate goes even deeper.

Under subparagraph (d) of section 17, the Securities and Exchange Commission would have the power, if section 7 of the bill is passed,

to regulate any transaction in which any of the many carriers I have mentioned, or any of the members of the New York Central System is a joint or a joint and several participant with the New York Central, the Pittsburgh & Lake Erie, or any other company controlled by the New York Central. There are innumerable transactions occurring daily which would fall within that regulatory power. New York Central handles shipments every day under joint rates with the other carriers I have named, and each of those carriers is a joint participant in the transaction. The revenues received are divided according to divisions jointly established. The carriers join together in establishing per diem rates for the payment to the car owner for the use of cars. Central's cars move daily on the railroads of those other carriers and their cars are used daily by Central. Central participates with the other railroads in pooling arrangements. The financing of jointly owned terminal facilities and switching companies is frequently done by the terminal or switching company issuing bonds guaranteed by their proprietory companies. Central jointly participates in such transactions with the affiliated companies I have named.

All of such transactions could be made the subject of rules and regulations by the Securities and Exchange Commission if section 7 were passed, and indeed, the Commission has adopted rule N-17D-1 which would require prior approval of most of such transactions. Such transactions are presently subject to regulation by the Interstate Commerce Commission under the Interstate Commerce Act.

Other examples could be given, but the ones I have named are sufficient to show that the regulatory power which would be lodged in the Securities and Exchange Commission by section 7 of S. 1181 would cover transactions vital to the daily operations of the New York Central. I would like to add also that section 12 of the Investment Company Act would place restrictions on Central and other controlled companies in the Central system.

The dual regulation which would result if section 7 becomes law would create an intolerable burden on the New York Central. In addition to being subject to the all-pervasive regulatory power of the Interstate Commerce Commission, as well as regulatory commissions in each of the States in which it operates, it would be subjected to yet another set of regulatory rules of conduct. On the one hand, its conduct would be examined in the light of the national transportation policy by a body having expertise in transportation; on the other hand, a body lacking familiarity with transportation would examine proposed transactions in an entirely different light, the policy and purposes of the Investment Company Act.

There is no sound justification for increasing the present extensive regulatory control over the New York Central system by subjecting transactions to which it is a party to more regulatory control, which would be inapplicable to other railroads and competitors if a member of the Central system is not a party to the transaction. Such additional, and in many instances, dual regulation would further weaken Central's ability to meet its competition at a time when its competitive position should be strengthened, not weakened.

The Securities and Exchange Commission itself does not appear to have intended that any carrier be subjected to dual regulation. In

its memorandum in support of S. 1181 it accepted expressly as a basic premise that

the intent of section 3 (c) (9) in providing an exception from the act was to avoid subjecting a railroad or a railroad holding company to dual regulation under both the Interstate Commerce Act and the Investment Company Act. Apparently, the frequency and the scope of interaffiliate transactions in the railroad industry was overlooked.

Congress has established a policy of avoiding dual regulation, and there appears to be no valid reason why that policy should now be changed. The statute itself should protect against such dual regulation. It is no answer to say that the Securities and Exchange Commission could exempt any person, security, or transaction from the act or refrain from adopting rules and regulations applicable to interaffiliate transactions. If the power is granted in the statute, the duty to administer that power, and the temptation to exercise it, is ever present.

A few days ago, I believe it was at the last hearing, a suggestion was made that perhaps the jurisdiction over Alleghany Corp. could be separated between the ICC and the SEC. As far as the New York Central Railroad is concerned, if Alleghany is required to become a registered investment company under the Investment Company Act of 1940, this effect of the interaffiliate transaction would lodge upon the New York Central Railroad Co.

Senator WILLIAMS. I missed that last, I am sorry.

Mr. GRAY. The interaffiliate transaction regulatory power would apply to the New York Central if Alleghany becomes a registered investment company for any purpose or for any part of the act.

S. 1181 should be amended by deleting section 7.

Senator WILLIAMS. Thank you very much, Mr. Gray. Your statement certainly opens the way to a lot of inquiry and a lot of new thought. Of course, all is not dark around here these days for the New York Central System and other railroads, or at least temporarily it is bright. As you know, the Senate Finance Committee removed the 10 percent excise tax on railroad tickets, and today we will have a chance to vote on it in the Senate. We are very hopeful that we will be able to maintain the amendment. Though things might be dark again tomorrow.

us.

Mr. GRAY. Thank you.

Senator WILLIAMS. I have a few questions, if you will remain with

How long have you been general counsel for the New York Central System?

Mr. GRAY. Since 1956.

Senator WILLIAMS. Were you with the system prior to that? Mr. GRAY. Yes, I was with the New York Central since 1951. Senator WILLIAMS. You have been with them, then, through the change of ownership?

Mr. GRAY. I have. I am a carryover.

Senator WILLIAMS. You have seen the stormy days.

Mr. GRAY. Yes.

Senator WILLIAMS. You mentioned only two sections of the Investment Company Act that you felt would have a serious effect on the New York Central System. Section 17, and, parenthetically, you

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mentioned section 12. If the SEC does gain the jurisdiction that it seeks through its proposal in section 7 of the bill, are these the only two sections that you feel would have an effect on New York Central? Mr. GRAY. My testimony was directed toward the direct effect of the Investment Company Act on the New York Central. There, of course, is always the indirect effect of the regulation of Alleghany upon the New York Central and its system because of the parent relationship of Alleghany to that system. By that I mean that if through the regulation of Alleghany situations are created whereby they are controlled for the purposes of the Investment Company Act, it may not be consistent with the indirect effect upon the New York Central and its regulations under the Transportation Act, in furtherance of the transportation policy.

What I am thinking of-and this is an indirect effect which I did not cover-if Alleghany is brought in and regulated by the SEC, there may come a time when their regulation for the benefit of the investors and Alleghany may not be consistent with the regulation of the New York Central for the transportation policy set forth in the Interstate Commerce Act. There will be that indirect effect. But as far as the direct effect is concerned, in reading the Investment Company Act I found that the only place that we would be directly affected would be as a controlled company, and the Investment Company Act has restrictions on controlled companies only in sections 12 and 17.

Senator WILLIAMS. I see. You have described completely the effect you imagine of the imposition of section 17, but I was not clear as to just what the effects in your judgment would be as to section 12. Mr. GRAY. Section 12 has a direct restriction against purchase of certain securities and certain companies, such as an investment company, an insurance company, and underwriter's dealers, that sort. There would be a limitation upon the New York Central as a controlled company to invest in or purchase parts of those businesses. As far as I know, there is no plan in the New York Central so to do, but it is another restriction on the New York Central as to the law stating what it could not do.

Senator WILLIAMS. I see. You have described the maze of affiliation of New York Central with scores of other companies, and I received the impression that the relationship between New York Central and these numerous other companies was a relationship that went to transportation matters exclusively. Is that a proper assumption on my part?

Mr. GRAY. In the affiliation that we have with outside railroad companies that is true. We do have companies within our central system which are not technically carriers within the Interstate Commerce Act but yet are used as part of the New York Central family of corporations in its business.

Senator WILLIAMS. Could you name a company and describe this? Mr. GRAY. Yes. For instance, we have one corporation that has the exotic name of Exotic Enterprises, Inc., which is a company that holds presently a part of a railroad that was purchased after the receiver's sale of the New York, Ontario & Western. That company was placed in this land company pending the necessary approval of the Interstate Commerce Commission to bring it into the New York