The proposed substitute language has been circulated among industry representatives who testified at the hearings on this matter. We have been advised by counsel for Atlantic Coast Line Co., New York Central Railroad Co., and the Association of American Railroads that they do not have any objection to the present proposal.

Mr. David Wallace, vice preseident of Alleghany Corp., has expressed fears that there will be a retroactive application of the Investment Company Act which will invalidate some of the outstanding securities of Alleghany. In our view, there is no statutory bar to the conversion into common stock of Alleghany's outstanding convertible preferred stock or the exercise of its outstanding warrants for common stock in accordance with the terms of these securities. These securities were issued when Alleghany was not registered under the Act and there is no question of evasion involved. Both the convertible preferred stock and the warrants were approved by the Interstate Commerce Commission, as was the common stock on which those securities have a call. If Alleghany becomes a registered investment company and has any doubts in this regard, we shall, pursuant to the specific authority granted under section 23(b) of the act, so declare upon application of Alleghany.

I am also enclosing one copy of each of a memorandum discussing the operation of these modified provisions and a general memorandum directed to the whole section 3(c)(9) matter. These memoranda were inserted in the record of the hearing today before the Subcommittee on Commerce and Finance, House of Representatives, on the Commission's legislative program.

Sincerely yours,

EDWARD N. GADSBY, Chairman.

PROPOSED MODIFICATIONS RELATING TO AMENDMENT OF SECTION 3(c)(9) of INVESTMENT COMPANY ACT OF 1940

1. Section 7 of S. 1181 would be modified to read as follows:

"(9) Any company (A) which is subject to regulation under the Interstate Commerce Act: Frovided, That this exception shall not apply to a company which the Commission finds and by order declares to be primarily engaged, directly or indirectly, in the business of investing, reinvesting, owning, holding, or trading in securities; or (B) whose entire outstanding stock is owned or controlled by a company excepted under clause (A) hereof: Provided, That the assets of the controlled company consist substantially of securities issued by companies which are subject to regulation under the Interstate Commerce Act; or (C) which is subject to regulation under the Interstate Commerce Act and substantially all of whose investment securities are issued by controlled companies subject to regulation under the Interstate Commerce Act."

2. The following new section would be added to the Investment Company Act: Section 6(f). The following transactions shall be exempt from the provisions of this title:

(1) Any transaction of a registered investment company which is also a carrier as defined in section 5(13) of the Interstate Commerce Act, or which, pursuant to section 5(3) of that act, has been ordered to be considered a carrier and subject to any of the provisions therein specified, involving (i) the acquisition of control of a carrier or carriers or (ii) the issuance of securities or assumption of any obligation or liability for purposes of financing the acquisition of control of a carrier or carriers or financing of a carrier business or a business incidental thereto, provided such transaction is subject to approval by the Interstate Commerce Commission.

(2) Any transaction between a registered investment company of the character described in subparagraph (1) of this subsection and an affiliated person or persons of such a registered investment company or an affiliated person or persons of such a person, or between any of such persons, provided the transaction is connected with the operation of the carrier business, or a business incidental thereto, in which any party to the transaction is engaged.

(3) Any transaction between an affiliated person of a registered investment company of the character described in subparagraph (1) of this subsection, which affiliated person is primarily engaged in the business of a carrier, and any controlled companies of such affiliated person, and any transaction between such controlled companies.

MEMORANDUM OF SECURITIES AND EXCHANGE COMMISSION ON PROPOSED MODIFICATIONS OF AMENDMENT TO SECTION 3(c)(9) OF THE INVESTMENT COMPANY ACT OF 1940

Section 7 of the bill, as originally introduced, would amend section 3(c) (9) of the Investment Company Act which now excludes from regulation as an investment company, companies subject to regulation under the Interstate Commerce Act. Under the amendment, the exception would be removed if such companies (designated herein as investment-carrier-holding companies) are found and determined by the Commission to be primarily engaged in the investment company business.

Two modifications are proposed. First, section 7 of the bill would be revised to add a new clause (C) to section 3 (c) (9). This amendment would otherwise remain unchanged. Second, a new provision would be added to the bill which would add a new section 6(f) to the statute.

The new clause (C) will except from the Investment Company Act any company which is subject to regulation under the Interstate Commerce Act if substantially all of the securities which the company holds are issued by carriers which it controls. This new clause (C) will allay any fears such as expressed by Atlantic Coast Line Co., in its testimony on July 9, 1959, on H.R. 2481 in hearings before the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce.

New section 6(f) is designed to implement the provisions of the amendment to section 3 (c) (9). The reason for handling the new exemptive provisions in a new subsection is that schematically, section 6 contains exemptions for persons otherwise subject to the act. Section 3(c) contains various exceptions, as distinguished from exemptions, from the definition of an investment company.

When the Commission has made the requisite findings under sections 3(c) (9) that an investment-carrier-holding company is an investment company, section 6(f), as a substantive matter, would then exempt various transactions of the company and its affiliated persons from the Investment Company Act. Thus section 6(f) (1) exempts the acquisition of control by the investment company of one or more carriers and the investment company's issuance of securities for this purpose. It thereby preserves the exclusive and plenary jurisdiction of the Interstate Commerce Commission over such matters. Similarly, it exempts the investment company's issuance of securities for the purpose of financing the carrier business or business incidental to that of a carrier, in which the investment company or any of its affiliated persons may be engaged. If the issuance of securities is not for these purposes, such issuance would have to meet the standards imposed by the Investment Company Act as well as the Interstate Commerce Act.

The Commission has stated that if the proposed amendment to section 3(c) (9) were to be adopted it would adopt exemptive rules excluding from its regulation the essentially carrier operations of affiliated persons of the investment company, and affiliated persons of such persons. Section 6(f) (2) obviates the necessity for such a rule, since it would exempt transactions between the registered investment company, its affiliated persons, or affiliated pesons of such affiliated persons, or between any of them, when the transaction is connected with the carrier operations of a party to the transaction. Section 6(f) (3), moreover, would exempt all transactions between a controlled carrier and companies which it in turn controls, or between any of them. While such a broad exemption goes further than that available to affiliated persons of other investment companies and may exempt some transactions not directly connected with carrier or incidental operations, it would appear that the ramifications of affiliations in an operating carrier system and the multiplicity of their transactions, would make it administratively undesirable to attempt to regulate these routine transactions.

The appendix attached hereto illustrates the operations of section 6(f). We show therein, by separate charts, the type of transactions subject to ICC regulation only, those subject to SEC regulations only, and those subject to regulation by both agencies. New section 6(f) we believe makes clear that the type of transactions referred to by James B. Gray, general counsel of the New York Central Railroad Co., in his testimony during the hearings are either not reached by the statute itself as presently written, or will not be reached if these amendments are adopted.

APPENDIX

In order to illustrate the operations of proposed section 6(f) of the Investment Company Act, hypothetical transactions between various types of persons will be tested under the provisions of section 6(f) and the applicable regulation in the Securities and Exchange Commission and the Interstate Commerce Commission will be indicated. The individual charts which follow group the hypothetical transactions in terms of the agency which will have jurisdiction. The transactions themselves are identified by number, and the description follows after the charts.

It should be noted that the Investment Company Act, for the purpose here under consideration, imposes no limitations on the kinds of property or securities which may be acquired by an investment company or its controlled companies. The act imposes limitations on the kind and amount of senior securities which may be issued by an investment company in connection with any transaction, but contains no restriction on the type of securities which may be issued by a controlled company or other affiliate. The act also imposes limitations upon affiliated persons of the investment company and affiliated persons of such persons, buying from, or selling securities or property to the investment company or its controlled companies. It should be noted that the restrictions of the act in this regard do not reach transactions between affiliated persons unless one of them is controlled by the investment company.

I. Transactions between holding company and-

(a) Nonaffiliates:

Transaction 1. Investment company buys from John Smith controlling interest in X railroad (ICC-5(2); SEC, inapplicable).

Transaction 2. Same as No. 1 but investment company issues its notes in payment (ICC−5(2), 20a; SEC, exempt, 6(f) (1)).

Transaction 3. Investment company buys from John Smith controlling interest in woolen mill (ICC, inapplicable; SEC, inapplicable).

Transaction 4. Same as No. 3 but investment company issues its 5-year notes in payment (ICC-20a; SEC, 18(a)).

(b) Affiliate:

Transaction 5. Investment company buys from director, or carrier 1, controlling interest in X railroad (ICC-5(2); SEC, exempt, 6(f) (1)).

Transaction 6. Same as No. 5 but investment company issues its 5-year notes in payment (ICC-5(2), 20a; SEC, exempt, 6(f) (1)).

Transaction 7. Investment company buys from carrier 1 or director (or directors partner) stock of steel company (ICC, inapplicable; SEC, 17(a)). Transaction 8. Same as No. 7 but investment company issues its 5-year notes plus long-term warrants in payment (ICC-20a; SEC, 17(a), 18(a), and (d)).

Transaction 9. Carrier No. 2 borrows money on long-term note from investment company to purchase interest in bridge company from carrier No. 1 (ICC-20a; SEC, exempt, 6(f) (2)).

Transaction 10. Same as No. 9 except purchasing interest in oil company (ICC-20a; SEC, 17(a), 18(a)).

II. Transactions between a controlled affiliate of investment company and(a) Non affiliates (SEC, inapplicable).

(b) Affiliates (other than investment company parent which are covered in transactions 7, 8, 9, 10):

Transaction 11. Carrier No. 1 buys control block of stock in carrier No. 2 from director and issues long-term notes in payment (ICC-5(2), 20a; SEC, exempt, 6(f) (2)).

Transaction 12. Same as transaction 11 except stock is that of directors' milling company (ICC-20a; SEC-17 (a)).

Transaction 13. Carrier No. 3 borrows on long-term note from oil company (ICC-20a; SEC, exempt, 6(f) (2)).

Transaction 14. Water company borrows on note from oil company (ICC, inapplicable; SEC-17(a)).

Transaction 15. Carrier 1 and carrier 2 enters into joint lease, and operating and profit sharing agreement with respect to Bridge Co. (ICC, sec. 5(2); SEC, exempt, sec. 6(f) (2)).

Transaction 16. Same as transaction 15 except lease and agreement is with respect to water company (ICC, inapplicable; SEC, sec. 17 (d), rule 17d (1)).

Transaction 17. Carrier 1 issues its long-term notes to oil company in payment for shares of water company (ICC, sec. 20a; SEC, exempt, 6(f) (3)).