Hon. HARRISON A. WILLIAMS, Jr., Chairman, Subcommittee on Securities, INTERSTATE COMMERCE COMMISSION, DEAR SENATOR WILLIAMS: At the hearing before your subcommittee on June 24, 1959, you requested that further exploratory conferences be held between members of our staff and the staff of the SEC, concerning S. 1181, a bill to amend certain provisions of the Investment Company Act of 1940, as amended, and that a report of the results of the conferences be made to the subcommittee. Those conferences have been held and the problem has been further considered by this Commission. Our position may be summarized generally as follows: 1. It is not necessary that this Commission continue to have exclusive and plenary jurisdiction over the issuance of securities by a company primarily engaged in the business of investing, reinvesting, owning, holding or trading in securities, which also may be subject to its regulation, and this Commission agrees that the SEC should have concurrent jurisdiction in respect of the issuance of securities or assumption of obligation except where the issuance or assumption is for financing the acquisition of control of one or more carriers subject to the Interstate Commerce Act or financing the operations of any such carrier. 2. Holding companies which are subject to regulation under the Interstate Commerce Act, substantially all of whose investment securities consist of securities issued by controlled companies subject to regulation under the Interstate Commerce Act, should not be made subject to the provisions of the Investment Company Act. Such companies are of the type covered by section 3(b) (2) of the Investment Company Act, and even in the absence of a specific provision such as that hereinafter recommended, upon application probably would be found exempt under section 3(b) (2). 3. Dealings between carriers and their subsidiaries, or between such subsidiaries should be exempted from regulation under the Investment Company Act, except in those cases where the carrier or its subsidiary is found by the SEC to be primarily engaged in the business of investing, reinvesting, owning, holding, or trading in securities. The following amendments to the bill, prepared as a result of the conferences between members of the staffs of the two Commissions, have been agreed to and are recommended by this Commission, and it is our understanding they have been approved also by the Securities and Exchange Commission: Amend section 7 of the bill to read as follows: "SEC. 7. Subsection (c) (9) of section 3 of the Investment Company Act of 1940, as amended, is amended to read as follows: **(9) Any company (A) which is subject to regulation under the Interstate Commerce Act: Provided, 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.'" Add a new section to the bill to amend section 6 of the Investment Company Act by adding a subsection (f) thereto reading as follows: "SEC. 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 char acter 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 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." After the above-mentioned agreement was reached, a memorandum of counsel for Alleghany Corp. was submitted to General Counsel Meeker of the Securities and Exchange Commission which, inter alia, expressed apprehension as to the effect of the proposed amendment upon existing conversion, option, warrant, or other contractual rights previously approved by this Commission. Members of the SEC staff have informally stated to members of our staff, that, in their opinion, such existing contractual rights would not be affected; and our agree ment to the foregoing amendments was based on such understanding. We agree that existing contractual rights should not be affected, and suggest that the report of your committee make it clear that it is not intended to impair such rights. If any further information is desired in connection with this matter please let me know. Sincerely yours, KENNETH H. TUGGLE, Chairman. SUBCOMMITTEE ON SECURITIES OF THE U.S. Senate, Washington, D.O. (Attention: J. H. Yingling, Chief of Staff). NEW YORK CENTRAL SYSTEM, GENTLEMEN: I have read the proposed modification of section 7 of S. 1181 and the proposed new section 6(f) of the Investment Company Act submitted by Chairman Gadsby of the Securities and Exchange Commission to the subcommittee with his letter of August 4, 1959. This new proposal, if adopted, would provide exemptions from the act for the interaffiliate transactions about which I testified and, as stated by Chairman Gadsby, would eliminate the objections which the New York Central Railroad Co. has to section 7 of S. 1181. Yours very truly, JAMES B. GRAY. ALLEGHANY CORP., New York, N.Y., August 7, 1959. Mr. J. H. YINGLING, Chief of Staff, U.S. Senate, Committee on Banking and Currency, DEAR MR. YINGLING: This will acknowledge your letter of August 6, 1959, I have taken this matter up with counsel of Alleghany Corp., White & Case, and we feel that this new proposal of SEC presents serious problems to Alle ghany Corp. and its stockholders, upon which we request an opportunity to be heard at the convenience of the Subcommittee on Securities. Very truly yours, DAVID W. WALLACE (The following was ordered inserted in the record. Reference will be found on p. 197.) PROVISIONS OF THE INTERSTATE COMMERCE ACT DEALING WITH SECURITIES The provisions of the Interstate Commerce Act dealing with secu- SEC. 20a. (1) That as used in this section, the term "carrier" means a common carrier by railroad (except a street, suburban, or interurban electric railway which is not operated as a part of a general steam railroad system of transportation) which is subject to this [act] part, or any corporation organized for the purpose of engaging in transportation by railroad subject to this [act] part, or a sleeping-car company which is subject to this part. NOTE: An act of August 9, 1935 (49 Stat. 543) substituted the words "this part" for "this act." An act of August 2, 1949 (63 Stat. 487) added "or a sleeping-car company which is subject to this part" at the end of paragraph (1). (2) From and after one hundred and twenty days after this section takes effect it shall be unlawful for any carrier to issue any share of capital stock or any bond or other evidence of interest in or indebtedness of the carrier (hereinafter in this section collectively termed "securities") or to assume any obligation or liability as lessor, lessee, guarantor, indorser, surety, or otherwise, in respect of the securities of any other person, natural or artificial, even though permitted by the authority creating the carrier corporation, unless and until, and then only to the extent that, upon application by the carrier, and after investigation by the Commission of the purposes and uses of the proposed issue and the proceeds thereof, or of the proposed assumption of obligation or liability in respect of the securities of any other person, natural or artificial, the Commission by order authorizes such issue or assumption. The Commission shall make such order only if it finds that such issue or assumption: (a) is for some lawful object within its corporate purposes, and compatible with the public interest, which is necessary or appropriate for or consistent with the proper performance by the carrier of service to the public as a common carrier, and which will not impair its ability to perform that service, and (b) is reasonably necessary and appropriate for such purpose. (3) The Commission shall have power by its order to grant or deny the application as made, or to grant it in part and deny it in part, or to grant it with such modifications and upon such terms and conditions as the Commission may deem necessary or appropriate in the premises, and may from time to time, for good cause shown, make such supplemental orders in the premises as it may deem necessary or appropriate, and may by any such supplemental order modify the provisions of any previous order as to the particular purposes, uses, and extent to which, or the conditions under which, any securities so theretofore authorized or the proceeds thereof may be applied, subject always to the requirements of the foregoing paragraph (2). (4) Every application for authority shall be made in such form and contain such matters as the Commission may prescribe. Every such application, as also every certificate of notification hereinafter provided for, shall be made under oath, signed and filed on behalf of the carrier by its president, a vice president, auditor, comptroller, or other executive officer having knowledge of the matters therein set forth and duly designated for that purpose by the carrier. (5) Whenever any securities set forth and described in any application for authority or certificate of notification as pledge or held unencumbered in the treasury of the carrier shall, subsequent to the filing of such application or certificate, be sold, pledged, repledged, or otherwise disposed of by the carrier, such carrier shall, within ten days after such sale, pledge, repledge, or other disposition, file with the Commission a certificate of notification to that effect, setting forth therein all such facts as may be required by the Commission. (6) Upon receipt of any such application for authority the Commission shall cause notice thereof to be given to and a copy filed with the governor of each State in which the applicant carrier operates. The railroad commissions, public service or utilities commission, or other appropriate State authorities of the State shall have the right to make before the Commission such representations as they may deem just and proper for preserving and conserving the rights and interests of their people and the States, respectively, involved in such proceeding. The Commission may hold hearings, if it sees fit, to enable it to determine its decision upon the application for authority. (7) The jurisdiction conferred upon the Commission by this section shall be exclusive and plenary, and a carrier may issue securities and assume obligations or liabilities in accordance with the provisions of this section without securing approval other than as specified herein. (8) Nothing herein shall be construed to imply any guaranty or obligation as to such securties on the part of the United States. (9) The foregoing provisions of this section shall not apply to notes to be issued by the carrier maturing not more than two years after the date thereof and aggregating (together with all other than outstanding notes of a maturity of two years or less) not more than per centum of the par value of the securities of the carrier than outstanding. In the case of securities having no par value, the par value for the purposes of this paragraph shall be the fair market value as of the date of issue. Within ten days after the making of such notes the carrier issuing the same shall file with the Commission a certificate of notification, in such form as may from time to time be determined and pre scribed by the Commission, setting forth as nearly as may be the same matters as those required in respect of applications for authority to issue other securities: Provided, That in any subsequent funding of such notes the provisions of this section respecting other securities shall apply. (10) The Commission shall require periodical or special reports from each carrier hereafter issuing any securities, including such notes, which shall show, in such detail as the Commission may require, the disposition made of such securities and the application of the proceeds thereof. (11) Any security issued or any obligation or liability assumed by a carrier, for which under the provisions of this section the authorization of the Commission is required, shall be void, if issued or assumed without such authorization therefor having first been obtained, or if issued or assumed contrary to any term or condition of such order of authorization as modified by any order supplemental thereto entered prior to such issuance or assumption; but no security issued or obligation or liability assumed in accordance with all the terms and conditions of such an order of authorization therefor as modified by any order supplemental thereto entered prior to such issuance or assumption, shall be rendered void because of failure to comply with any provision of this section relating to procedure and other matters preceding the entry of such order of authorization. If any security so made void or any security in respect to which the assumption of obligation or liability is so made void, is acquired by any person for value and in good faith and without notice that the issue or assumption is void, such person may in a suit or action in any court of competent jurisdiction hold jointly and severally liable for the full amount of the damage sustained by him in respect thereof, the carrier which issued the security so made void, or assumed the obligation or liability so made void, and its directors, officers, attorneys, and other agents, who participated in any way in the authorizing, issuing, hypothecating, or selling of the security so made void or in the authorizing of the assumption of the obligation or liability so made void. In case any security so made void was directly acquired from the carrier issuing it the holder may at his option rescind the transaction and upon the surrender of the security recover the consideration given therefor. Any director, officer, attorney or agent of the carrier who knowingly assents to or concurs in any issue of securities or assumptions of obligation or liability forbidden by this section, or any sale or other disposition of securities contrary to the provisions of the Commission's order or orders in the premises, or any application not authorized by the Commission of the funds derived by the carrier through such sale or other dispositoin of such securities, shall be guilty of a misdemeanor and upon conviction shall be punished by a fine of not less than $1,000 nor more than $10,000, or by imprisonment for not less than one year nor more than three years, or by both such fine and imprisonment, in the discretion of the court. |