jurisdiction of the Interstate Commerce Act. It also embodies an accommodation in those areas in which, because of the dual nature of the companies involved as investment companies with control over carriers or with some carrier operations, their activities may impinge on the national public interest as it is expressed in the Investment Company Act and as it is expressed in the Interstate Commerce Act.

The area of overlapping jurisdiction is, fortunately, not great. As noted, the ICC has jurisdiction over the acquisition of control of two or more carriers by persons who are not carriers. The Investment Company Act requires only that the intention to acquire such control be stated among the investment policies which the company adopts. No conflict is to be anticipated here.

If the acquisition of control over carriers is to be made from an affiliated person of the investment company, it would require a finding by the SEC under section 17 that it was a fair transaction before it might be consummated. However, the SEC is of the view that such an acquisition is essentially a carrier operation as a "unification of railroads," and therefore of direct concern to the ICC in the implementation of the national transportation policy. Accordingly, as manifested in the new section 6(f), we propose that a transaction of this character be subjected only to the scrutiny of the ICC. Presumably the ICC's powers are sufficiently pervasive to consider any unfairness aspect of the matter. Similarly, were this hypothetical acquisition of a controlling block of stock of a railroad to be financed by the issuance of securities, ICC approval thereof under section 20a would be required. If these securities meet the standards of section 18 of the Investment Company Act no approval of the SEC would be required even if the company were fully subject to the requirements of the Investment Company Act. Here again, since the unification of railroads is at issue and the security issuance is incidental, we propose in section 6(f) to make section 18 inapplicable to this type of transaction and thus preserve the exclusive and plenary jurisdiction of the ICC under section 20a. In keeping with our approach where matters of carrier operations are directly involved, we further propose in section 6(f) that companies which are primarily engaged in carrier or related operations and which are affiliates of an investment company, be exempted from the affiliate restrictions of section 17 of the Investment Company Act in their transactions between themselves or with other persons relating to their carrier or related operations. This exemption contained in new section 6(f), is designed to reach the problems which Mr. Gray, counsel to the New York Central, outlined in his statement to this committee.

So far as the investment activities of the investment-holding company are concerned, many of these activities are beyond the reach of the Interstate Commerce Commission and presently are unregulated. The effect of the revised bill would be to subject certain of these activities to regulation solely under the Investment Company Act. Obviously no conflict of regulation will arise in these situations.13

We turn now to the areas in which there will be dual regulation, namely, the issuance of securities, accounting, and reporting.

We propose that the issuance of securities by investment-holding companies, for purposes other than the financing of carrier or related operations or the acquisition of control over carriers, be subject to regulation under the Interstate Commerce Act and the Investment Company Act.

In a given case the provisions of section 18 of the Investment Company Act may impose more restrictive standards on the issuance of senior securities (i.e., debt and preferred stocks) than may be thought necessary by the ICC under section 20a in order to limit the parent company's fixed charges in the interests of controlled carriers and their security holders. It is difficult to see how compliance with these more restrictive standards will detrimentally affect these interests. To the extent that the converse situation obtains the ICC jurisdiction will remain and its exercise will be without detriment to the parent company investors.

13 Certainly, the many unregulated transactions in which Alleghany has engaged, shown in appendix A, do not evidence a particular concern for the interests of investors in its subsidiary railroad securities whom Alleghany now so vigorously seeks to protect from the alleged inexpertise of the SEC. We do not comment upon the protection afforded the interests of Alleghany's own investors to be found in these unregulated transactions since many of them formed the basis of derivative stockholders' actions which are now in the process of settlement.

1

Similarly, the interests of carriers and their security holders would not be adversely affected if a parent investment company could not finance its investment activities, or make adjustments in its capital structure, by the use of longterm warrants or rights to purchase common stock, which are proscribed by the provisions of section 18(d) of the Investment Company Act.

Alleghany has represented to this committee that the ICC in approving the exchange of its convertible 6 percent preferred stock for its outstanding 51⁄2 preferred stock determined that the "best interests of the national transportation system and of investors in Alleghany justified the issuance of Alleghany's 6 percent preferred stock." Alleghany would thus imply that the action of the SEC in failing to exempt the issuance of this stock from section 18(d) of the Investment Company Act was detrimental to these interests. Contrary to Alleghany's representation the ICC stated:

"It does not appear that the proposed issue will adversely affect any carrier under the control of the applicant, or impair such carrier's ability to serve the public. Nor, with the modification hereinafter stated, does it appear that the proposal will be unfair or inequitable to any class of the applicant's stockholders." It then made the statutory findings required by the act."

The preferred stock exchange was designed as a method of eliminating the arrears on the outstanding preferred stock, which had been accumulating for over 25 years. Thus, the impediment to payment of dividends on Alleghany's common stock would be removed. Other methods of accomplishing this objective existed. The record created before the SEC disclosed that these alternatives were not considered by Alleghany's management to be as advantageous to the holders of common stock. The SEC found that the new preferred stock was in essence a right to purchase common stock within the intendment of section 18 (d) of the act. This right to purchase was not only a highly volatile and speculative security, but it rendered the common stock as well highly volatile and speculative. Both securities were rendered inherently difficult to evaluate and the very experts introduced to support the exemption application differed sharply as to values. In the light of the entire record, the SEC could not find the exemption consistent with the protection of investors.

Because of the adverse effect of this type of security on investors, both present and future, the Investment Company Act proscribes management's choice to issue this type of security and compels a more conventional method of accomplishing the objectives sought by the proposed exchange. It is this kind of restriction on management's choice made in the interests of one class of its security holders, which causes Alleghany's present obsession with "strangulation," rather than dual regulation.

Section 23 of the Investment Company Act would also be applicable to the issuance of securities for investment purposes. Generally speaking, section 23 prohibits the issuance of securities for services or property and prevents the issuance of common stock at less than net asset value. Refusal of the SEC or ICC to permit the issuance of watered securities or securities resulting in dilution would not adversely affect either interest these agencies seek to protect, nor would it create any conflict.

Of the same genre are the conflicts which Alleghany suggests might exist if the SEC invokes the powers under section 25 of the Investment Company Act to "thwart" ICC approval of securities. The only powers under section 25 which could be used in the manner suggested are those granted to a district court of the United States to enjoin the consummation of any plan of reorganization which the court determines "to be grossly unfair or to constitute gross misconduct or gross abuse of trust on the part of officers, directors, or investment advisers of such registered company or other sponsors of such plan." Even were the farfetched assumption to be made that the ICC would approve the issuance of securities in connection with such a plan, its plenary and exclusive jurisdiction may in any event be thwarted under existing law by a suit of stockholders. Section 25 merely grants the SEC the power to bring proceedings, in the statu

14 The ICC found that the transactions were "consistent with the proper performance of its service to the public by each carrier which is under the control of such corporation, that it will not impair the ability of any such carrier to perform such service, that it is otherwise consistent with the public interest, and that it (a) is for lawful objects within its corporate purposes and compatible with the public interest, which are necessary and appropriate for and consistent with the proper performance by such 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 purposes.'

tory words, "upon behalf of security holders of such registered company, or any class thereof." It creates no new conflicting rights.

Section 30 of the Investment Company Act, as interpreted by the SEC, imposes no requirements as to the keeping of accounts other than compliance with sound accounting principles. This would not require any changes in the method of internal accounting followed by the type of investment companies we are concerned with here. The reports required to be filed with the SEC under the Investment Company Act would contain all of the substantive data and most of the details contained in the reports currently being filed with the ICC. The reports to the SEC would be supplemented, however, with data essential to the interests of investors, such as disclosure of realized gains or losses on investments, statements of unrealized appreciation or depreciation of investments, information showing the value as well as the cost of each investment and information showing separately the distribution made to shareholders from net investment income and from realized gain on investments. Information is also required as to ratios of operating and management expenses to average value of total net assets and total investment income.

Any fears that the interests of the consumer and investor public in carriers might be adversely affected by concurrent SEC regulation of these investment companies are wholly without foundation. The SEC is fully aware of the impact of parent company activity on its subsidiaries and the consumer and investment interests therein. Indeed, the fundamental purposes of the Public Utility Holding Company Act of 1935, which the SEC administers, is the protection of the public interest and the interests of investors and consumers. To this end extensive powers over the affairs of electric and gas utility holding companies and their operating subsidiaries are granted the SEC. State regulation of operating utility companies is thus to be made more effective. Similarly, certain electric utility companies which are subject tot he Federal Power Commission jurisdiction in respect of rates, accounting, and other regulatory matters, are also subject to the SEC's concurrent jurisdiction, which is paramount in the event of conflict.

Alleghany has sought to create the impression that if it were subject to regulation under the Investment Company Act many of the securities which it has issued would be unlawful and to the extent that conversion or exchange rights exist thereunder they would be inoperable. The Investment Company Act has never been construed to invalidate the rights created by securities which were issued by companies in good faith at a time when they were not subject to the act. Alleghany's status at the time it issued its outstanding securities has been definitively determined by the Supreme Court of the United States. We do not believe, as Alleghany has suggested to the SEC, that the bill need include specific provisions to aflirm the validity of these contract rights.

APPENDIX A

This appendix contains a summary of various transactions in which Alleghany has engaged since October 4, 1945 which would have been subject to regulation under the Investment Company Act had Alleghany been registered under that act. This summary is not represented as being definitive since the SEC does not have knowledge of all of the activities and transactions of Alleghany since it ceased to be a registered investment company. We have examined available reports and other information filed by Alleghany with the SEC and from this source have made up the following list of transactions which would have required an order of approval or exemption prior to their consummation, or would have been prohibited under one or more provisions of the act had Alleghany been a registered investment company during that period. The inclusion of a transaction in the list is not in any sense intended to imply that it would not have been approved or exempted by the SEC upon appropriate application therefor and the development of an adequate record. We shall also show whether such transaction, under the current proposals of the SEC, would have been subject to the exclusive regulation by either the SEC or ICC or dual regulation. (a) Transactions involving section 17 of the Investment Company Act

(1) The last of Alleghany's interest in the C. & O. was sold to Cyrus S. Eaton on or about January 18, 1954. Inasmuch as Mr. Eaton was chairman and president of Portsmouth Steel Corp., 18 percent of whose voting securities were then owned by Alleghany, this was a sale of Alleghany to an "affiliated person" (Eaton) of an "affiliated person" (Portsmouth) of an investment company as

defined in the Investment Company Act. Assuming the applicability of that act, the transaction was not carried out in conformity with section 17 because it was not exempted by the SEC. This was not subject to regulation by the ICC and would not be so subject.

(2) On July 15, 1954 Clint W. Murchison and Sid Richardson sold to Alleghany an aggregate of 300,000 shares of New York Central for $7,500,000. In connection with the sale, separate joint venture agreements were entered into between Alleghany and Murchison Bros., and between Alleghany and Richardson, in which Murchison Bros. and Richardson each borrowed from Alleghany the sum of $3,750,000. Sid Richardson and Clint W. Murchison and Murchison Bros. are affiliated persons of affiliated persons of Alleghany. Assuming the applicability of the Investment Company Act, the sale of stock to Alleghany would be a transaction between Alleghany and affiliated persons of affiliated persons of Alleghany and would have been subject to section 17(a) (2), and, in the case of the loan, section 17(a) (3) of the Investment Company Act of 1940. These transactions were not subject to ICC regulation and would not be so subject. (3) On January 20, 1950, Robert R. Young and Allan P. Kirby, officers and directors (i.e. affiliated persons) of Alleghany, transferred to Alleghany certain shares of Alleghany's preferred stock, series A, on which dividends were in arrears to the extent of approximately $103 per share in exchange for the common stock of IDS, the cost of which to Alleghany was $392,800. Section 17(a) (2) would have applied to the exchange because it constitutes a purchase of the IDS stock within the meaning of the Investment Company Act. This transaction was not subject to ICC regulation and would not be so subject.

(4) During 1952 Herman R. Neff, a director of Alleghany (i.e. affiliated person), borrowed $67,500 from Alleghany in connection with the purchase for $67,500 by Neff from Allegany of 5,000 shares of stock of Portsmouth Steel Corp. Section 17(a) (3) would have applied to the borrowing and section 17(a) (2) to the purchase. This transaction was not subject to ICC regulation and would not be so subject.

(5) Alleghany has a continuing joint-venture agreement with Murchison Bros. (affiliated person of an affiliated person) for various types of property and security transactions. This agreement contemplates the making of Alleghany of secured loans to Murchison Bros. Section 17(a) (3) would apply to the loans and section 17 (d) would appear to apply to the joint venture. The transactions entered into pursuant to the joint venture have not been subject to ICC regulation, nor has the joint venture agreement, and apparently would not be so subject.

(b) Transactions involving other sections of the 1940 act

(6) In the spring of 1949 Alleghany purchased over 91 percent of the outstanding voting stock of IDS. Section 12(d) provides that "it shall be unlawful for any registered investment company *** to purchase or otherwise acquire ** any security issued by *** (1) any other investment company ***", except under certain circumstances not here pertinent. This transaction was not subject to ICC regulation and would not be so subject.

(7) The purchase on January 20, 1950, by officers of Alleghany of stock of IDS was made pursuant to an offer extended only to the officers of Alleghany to tender their preferred stock, series A, of Alleghany in exchange for the stock of IDS. Section 23(c) prohibits a registered closed-end investment company from purchasing any securities of any class of which it is the issuer, except, "(2) pursuant to tenders, after reasonable opportunity to submit tenders given to all holders of securities of the class to be purchased; or (3) under such other circumstances as the Commission may permit by rules and regulations or orders for the protection of investors in order to insure that such purchases are made in a manner or on a basis which does not unfairly discriminate against any holder of the class or classes of securities to be purchased."

(8) On October 24, 1952, Alleghany offered to the holders of its cumulative 52 preferred stock, series A, the right to exchange a share of such stock for a newly created 5 percent sinking fund debenture, series A, due November 1, 1952, in the principal amount of $100 and a warrant unlimited in time to subscribe for and purchase 20 shares of the common stock of Alleghany at a price of $3.75 a share.

Section 18 (a) (1) would have prohibited the issuance of the debenture because the exception in section 18 for refundings does not except the refunding of preferred stock by indebtedness.

In addition, section 18(d) would have prohibited the issuance of the subscription warrants without limitation as to time. The issuance of the debenture and warrants was subject to ICC regulation and would continue to be so subject as well as being subject to SEC regulation.

(9) On August 6, 1957, Alleghany granted to David W. Wallace, an officer, a restricted stock option to purchase up to 25,000 shares of its common stock at a price of $8.37 per share on or before May 2, 1961. This issuance is but one of several such issuances pursuant to a plan adopted in 1951 for the issuance of options to officers. Section 18(d) would be applicable to this long-term right to purchase common stock.

The issuance of common stock pursuant to the option was subject to regulation by the ICC and would continue so subject in the event that SEC exempted the option from the prohibitions of section 18(d).

(The following were ordered inserted in the appendix to the record. Reference will be found on p. 239.)

F-8965

INTERSTATE COMMERCE COMMISSION

FINANCE DOCKET No. 186561

LOUISVILLE & JEFFERSONVILLE BRIDGE AND RAILROAD COMPANY MERGER, ETC.

Submitted April 14, 1955. Decided May 24, 1955

Upon consideration of petitions herein granted in part, previous order by division 4, approving and authorizing the merger of the properties of the Louisville & Jeffersonville Bridge and Railroad Company, and necessary corporate rearrangements related thereto; holding that Alleghany Corporation is a carrier subject to the provisions of portions of certain sections of the Interstate Commerce Act; and terminating effective portions of the order of June 5, 1945, in Finance Docket No. 14692, affirmed. Previous report 290 I.C.C. 725. Request for hearing denied.

Appearances as shown in prior report; also, Thomas G. Meeker, and Myron 8. Isaacs for Securities and Exchange Commission, Joseph B. Hyman, George Brussel, Jr., for interveners, and Randolph Phillips for himself as intervener.

REPORT OF THE COMMISSION ON RECONSIDERATION

BY THE COMMISSION:

In this proceeding, by report and order of March 2, 1955, 290 I. C. C. 725, division 4 approved and authorized merger of the properties and franchises of the Louisville & Jeffersonville Bridge and Railroad Company (Jeffersonville) into the Cleveland, Cincinnati, Chicago & St. Louis Railway Company (Big Four) for ownership, management, and operation, and through that company, continued control of the said properties and franchises by The New York Central Railroad Company (Central) and the Alleghany Corporation (Alleghany); modified the lease of January 2, 1930, between Big Four and Central respecting operation of the properties of Big Four; continued Alleghany under the provisions of section 20 (1) to (10), inclusive, and section 20a (2) to (11), inclusive, of the Interstate Commerce Act, hereinafter called the act; terminated the effective portions of the order of June 5, 1945, in Finance Docket No. 14692; and retained jurisdiction to make such further order or orders as may be necessary or appropriate.

The Securities and Exchange Committee (S. E. C.) on April 1, 1955, filed a petition for reconsideration and reversal of the division insofar as it holds Alleghany to continue to be a carrier subject to provisions of the act under section 5 (3). The petition reiterates the contentions submitted in S. E. C.'s memorandums filed September 14 and December 14, 1954 (discussed at length under appropriate headings in the division's report). Alleghany and Central filed replies to the petition.

A petition for rehearing and reconsideration was filed March 21, 1955, on behalf of Lewis D. Gilbert and John Gilbert and Breswick & Company, seeking reconsideration of orders by division 4, dated February 9 and 15, and March 2, 1955, denying and dismissing their previously filed petitions for leave to intervene

1 Also embraces Finance Docket No. 14692, Chesapeake & O. Ry. Co. Purchase, 261 I.C.C. 239 and 271 I.C.C. 5.