ACCOUNTANT'S REPORT PEAT, MARWICK, MITCHELL & Co., ACCOUNTANTS AND AUDITORS, The Board of Directors and the Stockholders Alleghany Corp.: We have examined the balance sheet of Alleghany Corp. as of December 31, 1958, the related statements of income, net profit on security transactions, additional paid-in capital, and retained earnings for the year then ended and the accompanying investment schedules 1, 2, and 3. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinon, the accompanying financial statements present fairly the financial position of Alleghany Corp. at December 31, 1958, and the results of its operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. PEAT, MARWICK, MITCHELL & Co. Board of directors: William E. Eppler Allan P. Kirby Fred M. Kirby William G. Rabe Executive committee: William E. Eppler Fred M. Kirby William G. Rabe David W. Wallace Officers: Allan P. Kirby, chairman and president David W. Wallace, executive vice president and secretary Thomas J. Deegan, Jr., vice president-staff Jared C. Horton, treasurer and assistant secretary Edward Y. Baugeard, assistant secretary and assistant treasurer Registrars: $4 prior preferred stock: The Marine Midland Trust Co. of New York 6 percent convertible preferred stock: The Colonial Trust Co. 52 percent preferred stock, series A: First National City Bank of New York Common stock: Guaranty Trust Co. of New York Transfer agents: J. P. Morgan & Co., Inc. Central National Bank of Cleveland (The memorandums referred to in Mr. Wallace's testimony follow. Reference will be found on p. 239.) ALLEGHANY CORP. MEMORANDUM DATED MARCH 31, 1959, RE H.R. 2481 AND S. 1181 The SEC has suggested an amendment to section 3(c) (9) of the Investment Company Act of 1940 aimed primarily at subjecting Alleghany Corp. to the full jurisdiction of the SEC under that act. If the amendment becomes law, Alleghany will be the only company in the country subject to conflicting dual jurisdictions of the Interstate Commerce Act and the Investment Company Act. We do not contend that dual jurisdiction is per se bad. It is only when the two jurisdictions conflict and two great governmental agencies necessarily pull in different directions that dual jurisdiction becomes chaotic. Such will be the effect of the proposed amendment. No lesser authority than the SEC has recognized this. When the SEC filed a brief in 1957 with the Supreme Court of the United States in Alleghany Corporation, et al. v. Breswick & Co., et al., it aptly described the situation that would result if its present proposal were enacted into law. It said: "The legislative history of section 3 (c) (9) makes it clear that it was intended to avoid the 'conflict and confusion' which might arise if companies were subjected to the jurisdiction of both the ICC and SEC in respect of the issuance of securities, the manner of keeping accounts and records, and the filing of reports." SEC cited as authority for what it said to the Supreme Court Senate hearings on S. 3580 (76th Cong., 3d sess., pt. 2, pp. 777-778). At the outset, it must be understood that Alleghany does not seek to escape appropriate regulation and is indeed at present subject to the jurisdiction of both the SEC and the ICC without conflict in numerous important areas. It is even at present subject to the Investment Company Act in areas where there is no such conflict. Alleghany is also subject to the SEC under several other important acts administered by that Commission. If the amendment is passed, Alleghany would be the only company enmeshed in a morass of conflicting jurisdictions and would, contrary to the best interests of the public and its stockholders, be singled out as the most regulated company in the entire country. In order to understand just what the situation will be if the proposed amendment passes, it is necessary first to understand what the situation is now. At present Alleghany is subject to many of the provisions of the Securities Act of 1933, such as the antifraud provisions. Alleghany is also subject, just as is every other corporation in the land which has securities listed on a national stock exchange, to full SEC jurisdiction under the Securities Exchange Act of 1934. Since approximately 1 percent of Alleghany's assets at cost are shares in an investment company (which company, Investors Diversified Services, is fully subject to the Investment Company Act), Alleghany is and has been subject to the Investment Company Act as to its relations with IDS. ICC, of course, continues to regulate the corporate structure and financial practices of Alleghany, to protect against overcapitalization and imbalance between Alleghany's debt and preferred stock and its common stock equity, and to order compliance with other provisions of the Interstate Commerce Act as the public interest requires. The SEC does not suggest that ICC should relinquish this power over Alleghany. Nor does it suggest that other companies whose principal assets consist of controlling interests in rail or carrier securities should be regulated by SEC. Indeed, a brief examination of the definitions contained in section 3 of the Investment Company Act (15 U.S.C., sec. 80a-3) demonstrates that more companies whose assets consist entirely of securities are not investment companies than are. Section 3(c) lists numerous substantial categories of noninvestment companies, such as banks, insurance companies, bank holding companies, and public utility holding companies. Furthermore, section 3(a)(3) of the Investment Company Act described as an investment company one owning or holding "investment securities" in excess of 40 percent of the value of its total assets other than cash and Government securities, but excludes from the term "investment securities" securities issued by majority-owned subsidiaries. Accordingly, many companies can and do engage exclusively in the business of owning securities to the extent of 100 percent of their assets without regulation by SEC so long as at least 60 percent of these are securities of majorityowned subsidiaries. All the SEC seems now to say is that Alleghany alone should be subject to the conflicts and confusion SEC has recognized can result from plenary Investment Company Act jurisdiction side by side with plenary Interstate Commerce Act jurisdiction. If SEC thinks Alleghany's stockholders should, as it says, not be "deprive[d] *** of the protections and safeguards of the Investment Company Act," why should stockholders of all companies engaged in the business of holding securities not be thought by SEC to deserve that same protection? FALLACIOUS BASES OF SEC'S NEW POSITION The essence of the SEC's present position is that one company too many is presently among the many corporations investing in securities which are not required to register as investment companies. SEC apparently believes that Alleghany is not a railroad holding company. In support of that belief, in its memorandum to Congress it compares apples and pears. It equates the market value of assets with their cost. The SEC (p. 10 of its memorandum) argues that "the bulk of the assets" of Alleghany consists of investment securities. SEC adds (p. 10 of its memorandum) that "a relatively smaller investment of Alleghany Corp. has been in its holdings of New York Central Railroad stock." The unfairness is in the equation of "bulk of the assets" with "a relatively smaller investment." On a cost basis, Alleghany's investment in rail securities amounts to about 66 percent of its investments. True it is that one of Alleghany's present investments (IDS, the investment company subject to the fullest extent to the Investment Company Act of 1940) was purchased for approximately $1,201,000 in 1949 and its value has risen to approximately $73 million. It is ridiculous to suggest that because one investment has been successful, ICC should move over, especially when this investment itself is fully subject to the Investment Company Act. SEC confuses cost of investments with how successful they are. Cost of investments is the true test of a company's investment policy. Rail securities are Alleghany's principal business. Alleghany is ICC's concern. SEC would have Congress believe that regulation under the Investment Company Act is "more pertinent, if more pervasive" than what SEC chooses to demean as "the limited regulation under the Interstate Commerce Act" (p. 9 of SEC's memorandum). The fact is that the Interstate Commerce Act grants to ICC more extensive powers of regulation over the issuance of securities than the Investment Company Act grants to SEC. Section 20a (2) of the Interstate Commerce Act requires ICC approval of all security issues of carriers prior to their issuance. Bank notes, guarantees and puts and calls are amongst the types of "security" which must be approved under section 20a (2). There is no comparable provision in the Investment Company Act. That act prohibits certain types of securities and specifies terms of others, as in sections 18 and 23, but requires no submission to, or approval of, SEC before the issuance of securities not prohibited by the statute. As examples of the careful investigation and detailed consideration which ICC gives to every proposed issuance of securities by Alleghany, we refer to a few of the Interstate Commerce Commission's decisions in respect of Alleghany. See, among others, Alleghany Corporation Note (F.D. No. 16214), 271 ICC 848 (1948); Alleghany Corporation Notes (F.D. No. 16567), 271 ICC 841 (1949); Alleghany Corporation Notes (F.D. No. 17005 and F.D. No. 17023), 275 ICC 813 (1950); Alleghany Corporation Note (F.D. No. 17423), 282 ICC 807 (1951); Alleghany Corporation Stock (F.D. No. 17356), 282 ICC 806 (1951); Alleghany Corporation Notes (F.D. No. 17871), 282 ICC 817 (1952); Alleghany Corporation Securities (F.D. No. 17937), 282 ICC 818 (1952); Alleghany Corporation Stock (F.D. No. 18162), 290 ICC 806 (1953). Under no act administered by the SEC is approval by SEC generally required. It will be seen that the "limited regulation" by ICC as to the issuance of securities is considerably more "pervasive" than such regulation under the Investment Company Act of 1940. When ICC approves an issuance of securities by Alleghany, it takes into ac count not only the interest of the investing public but the interest of the general rail transportation system of the country. The SEC lacks expertise in regard to transportation. It is perhaps because of SEC's lack of expertise in regard to carriers and carrier holding companies that Congress has seen fit, in all acts relating to the work of the SEC, invariably to provide for the exemption of carriers and carrier holding companies. Lest the impression be conveyed that ICC does not police the conduct of Alleghany's officers and directors, and that only the Investment Company Act's "pervasive" regulation would do so, we point to sections 20(7) and 20a (11) of the Interstate Commerce Act, among other statues to which Alleghany is subject, which provide for jail sentences and fines for misconduct on the part of Alleghany's officers and directors. JURISDICTIONAL DIFFICULTIES Section 50 of the Investment Company Act provides: title sion "Except where specific provision is made to the contrary, nothing in this shall affect ** (2) *** the jurisdiction of any other commis** of the United States *** in so far as such jurisdiction does not conflict with any provision of" the Investment Company Act. On the other hand, section 20a (7) of the Interstate Commerce Act provides that "the jurisdiction conferred upon [ICC] * * * shall be exclusive and plenary * * *” If ICC's jurisdiction is exclusive and plenary, then, under the proposed amendment, its jurisdiction necessarily would in the case of Alleghany "conflict with" provisions of the Investment Company Act. Thus, SEC's Investment Company Act jurisdiction would seemingly override that of ICC where there are conflicts. By the passage of this amendment, SEC will have divested ICC of jurisdiction in any conflicting areas, or, at the very least, be given a veto power over ICC's determinations. Can it be SEC suggests that Alleghany's stockholders need the "protection" of both the Investment Company Act and the Interstate Commerce Act, though no other company is so protected? Can this be necessary or advisable when Alleghany's common stockholders have heretofore been so protected that the asset value attributable to the common stock has come for a minus $99 million in 1937 to over plus $100 million as of March 30, 1959? Can dual conflicting regulation be necessary or advisable to "protect" Alleghany's preferred stockholders when Alleghany has since 1937 satisfied over $100 million in preferred dividend arrearages? It seems that Alleghany's stockholders have been adequately protected under the present statutory scheme of regulation. JOINT JURISDICTION HAS BEEN PUSHED AS FAR AS IT CAN GO; ADDITIONAL JOINT JURISDICTION WOULD CREATE IRRECONCILABLE CONFLICTS Passing the point that the plenary jurisdiction of ICC to regulate carrier holding companies will for the most part be destroyed by the enactment of the proposed amendment, and that the Investment Company Act has, in section 50, its own provision for assuring SEC primary jurisdiction, it may be pertinent to touch lightly on just a few of the many areas of conflict that would result from the amendment. Before doing that, we anticipate an SEC argument that conflicts could be eliminated because the SEC can, if it wishes, by virtue of section 6(c) of the Investment Company Act, "exempt any person, security, or transaction" from that act. Not only is it wrong to subject ICC determination and the regulated company to the whim and caprice of the SEC, but recent Alleghany history shows that SEC and ICC can and have held oppositely on important Alleghany matters. ICC, after the fullest of consideration in an adversary proceeding, determined in a lengthy opinion that the best interests of the national transportation system and of investors in Alleghany justified the issuance of Alleghany's 6 percent preferred stock. When a law suit was brought in respect of this matter and at a point when ICC's jurisdiction was under a cloud, SEC, at Alleghany's invitation, after the fullest of consideration in an adversary proceeding, considered the same matter and concluded in a lengthy opinion exactly the opposite of what ICC had held. The Supreme Court later not only upheld ICC's jurisdiction over Alleghany but also upheld ICC's approval of Alleghany's 6 percent preferred stock issue. Alleghany investors are, to say the least, delighted that SEC did not "protect" them, for the test of the market has redounded to their overwhelming benefit since the Supreme Court supported ICC and cleared the 6 percent preferred stock issue. Supposing the proposed bill had been law at the time Alleghany issued its 6 percent preferred stock, Alleghany would have had to conduct two long, administrative trials before two agencies (one for approval, the other for an exemption), with two rules of procedure, two sets of administrative precedents and two different governing standards. The two agencies would have come to two diametrically opposite conclusions, and Alleghany would have spent twice as much of its stockholders' money to wind up with a stalemate. Alleghany would then have had to review both orders. The two acts have different review procedures. A review of the ICC's order would be held before a statutory threejudge court; a review of the SEC's order would be held before the appropriate court of appeals. Each order might be upheld all the way to the Supreme Court, which Court could appropriately conclude that each agency acted properly within the framework of its governing statute, and the stalemate would remain. Is this the nature of the "protection and safeguards" SEC envisons for Alleghany's stockholders? Furthermore, if one agency approved an application of Alleghany and the other issued a conflicting order, Alleghany's officers would be subject to different criminal and civil penalties for obeying or disobeying the order of one or the other of the Commissions. This anomalous result could not occur under such dual regulation as presently exists in nonconflicting areas. Amongst the multitude of conflicts in the two acts are, as SEC pointed out to the Supreme Court, the conflicting requirements as to the methods of keeping books of account. Complicated rules and regulations promulgated by the SEC under the Investment Company Act provide for the manner and method that investment companies should use in keeping their books. Complicated and different rules and regulations promulgated by the ICC provide for how Alleghany should keep its books. Alleghany is prepared to keep two sets of books if it must, but why should it be compelled to do so? CONCLUSION Alleghany is already regulated to a fare-thee-well by both ICC and SEC. The seemingly innocuous language of the brief proposed amendment does not begin to suggest the ramifications of the proposal. The conflicts and confusions which would descend upon those charged with administration of the Investment Company Act and the Interstate Commerce Act would very probably soon result in numerous requests for additional and necessary amendments to other provisions of both statutes to help untangle the inevitable legal snarls. The courts, too, could reasonably expect to have their congested calendars burdened by an influx of interpretive and review proceedings. There is more to this amendment than meets the eye. In the meantime, the so-called protections and safeguards of the Investment Company Act would be illusory. SUPPLEMENTAL MEMORANDUM DATED APRIL 21, 1959 The amendment of section 3 (c) (9) of the Investment Company Act of 1940 (Investment Act) proposed by the Securities and Exchange Commission (SEC) will transfer ultimate jurisdiction over Alleghany Corp. (Alleghany), a carrier holding company, from the Interstate Commerce Commission (ICC), expert in the national transportation field, to the SEC which is entirely without experience in dealing with either the financial or operating problems of carriers and carrier holding companies. If adopted, it will not vest in the SEC a mere veto power. The ICC will still be required to carry on its complicated regulatory functions as to Alleghany in conformity with the procedures, principles, and tests set forth in the National Transportation Act. This regulation by ICC of Alleghany will be subject to the simultaneous or subsequent administration by the SEC of the radically different procedures, principles, and tests of the Investment Act, and, to the extent the findings and orders of the inexpert SEC conflict with those of the ICC, inexpertness will prevail. Alleghany will be in the middle. Alleghany will be the most profusely and diversely regulated corporation in the land. It is not as if there existed a void in the pattern of regulation. Deputy Attorney General Lawrence E. Walsh accurately expressed the existing law on this point when, as a member of a statutory three-judge court in 1957, he spoke for the unanimous tribunal.1 After stating that "The Commissioner's duty under section 20a is for the protection of investors as well as persons dependent upon transportation," he said: Breswick v. Alleghany, 156 F. Supp. 227, 234 (1957). Although this decision was subsequently overruled in 355 U.S. 415, there is no indication that the Supreme Court had any quarrel with the quoted statement. |