other commercial activity either directly or through the instrumentality of subsidiaries.10 In our findings and opinion in the case of United States Corporation, 10 S. E. C. 1145 (1942), in which an order granting exception under Section 3 (b) (2) was issued, we found that the officers of the parent company were actively engaged, as representatives of the parent, in the operation and management of the subsidiary companies. This participation was an important factor in our holding that the parent was primarily engaged in the business of the subsidiary companies. In the absence of similar evidence in this proceeding we are unable to find that the company is primarily engaged in the railroad business, even though its primary investments are railroad securities. In our opinion, to be entitled to a declaratory order under Section 3 (b) (2), the applicant must come forward with affirmative evidence in order to provide a basis for an affirmative finding on our part that it is primarily engaged, directly or indirectly through subsidiaries, in a business other than that of owning or holding securities. The applicant has not done so but has, through its witness and counsel, negatived any such contention. The application in this respect must, therefore, be denied. 3. EXEMPTION UNDER SECTION 6 (c) It remains to be seen whether and to what extent the applicant is entitled to any exemption from the provisions of the Investment Company Act. Section 6 (c) provides as follows: (c) The Commission, by rules and regulations upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this title or of any rule or regulation thereunder, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title. This broad exemptive power was put into the Act for the purpose, among others, of permitting the exemption of persons or classes of persons "who are not within the intent of the proposed legislation..."11 even though such persons come within the scope of the Act by virtue of its specific provisions. The section, together with Section 6 (e), permits the exemption to be made by order subject to conditions and to be so qualified as to leave the person in question within the scope of some provisions of the Act while exempting it In the pre 10 Applicant is not itself authorized by its charter to operate a railroad. liminary opinion in this case (see footnote 1, supra), we found that the applicant was not presently subject to regulation by the Interstate Commerce Commission within the meaning of Section 3 (c) (9), although, as a railroad holding company, it is subject to some of the provisions of the Interstate Commerce Act, as amended. 11 Sen. Rep. No. 1775 (76th Cong., 3d sess.) at p. 13. from others on the basis of the fair intent and purpose of the legislation rather than its precise wording. This was to take care of special situations that might have been overlooked or that could not be foreseen at the time the legislation was drafted.12 Thus it becomes pertinent to inquire whether or not the applicant is essentially a company of a type intended to be excluded from the scope of the Act. As we have seen, the applicant is an investment company within the provisions of the Act. Under the definition of Section 4 (3) it is a "management company," being neither a "face-amount certificate company" nor a "unit investment trust." The applicant had outstanding the following securities at December 31, 1940: Certificates of indebtedness, 5%, irredeemable, $4,473,800 It is not offering for sale, nor does it have outstanding, any redeemable security of which it is the issuer. Thus it is not an "open-end" management company within the definition of Section 5 (a) (1). It does not meet the definition of "diversified company" under Section 5 (b) (1), but has 95.25 percent of its assets (at book values) invested in a single railroad system. Thus the applicant is a "closed-end," "nondiversified❞ management company within the meaning of Sections 5 (a) (2) and 5 (b) (2). Although the applicant has not made any substantial change in its portfolio for many years and may have no present intention of doing so, the power to make such a change exists and may be exercised at any time. The company has power to trade in securities, make additional investments, and in various other ways to engage in conduct which clearly comes within the provisions of the Act. Before granting an exemption under Section 6 (c), we must find that such exemption would be necessary or appropriate in the public interest and consistent with the protection of the investors and the purposes fairly intended by the policy and provisions of the Act. As we stated in our findings and opinion in American Participations, Inc., et al., 10 S. E. C. 430 (1941): The very breadth of a power to exempt any person, security, or transaction from any provision of the Act places upon us a grave responsibility that such power be exercised with the greatest circumspection. We must be alert to guard against the possibility that this Commission, established to implement the legislative will to protect investors, become the instrument through which the expressed policies of Congress are thwarted in case by case grants of exemption to any applicant who files and presses an application. 13 See the testimony of Commissioner Healy, Hearings before a Subcommittee of the Committee on Banking and Currency, United States Senate, on S. 3580 (76th Cong., 3d sess.), at pp. 872-874; also the testimony of David Schenker, id., p. 197. Petroleum and Trading Corporation, 11 S. E. C. 389 (1942). The applicant, as we have already demonstrated, comes within the scope of the Act and has shown no special circumstances entitling it to a general exemption. There is no evidence that compliance with the Act will subject applicant to any unreasonable burden or hardship. Under the circumstances, we find no basis for a general exemption in this case. Moreover, affirmative reasons appear for requiring the applicant to comply with the provisions of the Act. For example, it appears that the amounts at which the applicant carries its investments on its books are substantially in excess of their values as defined by Section 2 (a) (39), and that a statement of such values, in the interest of investors, should accompany balance sheets required to be transmitted to stockholders pursuant to Section 30 (d) (1). For another example, the applicant's financial statements set forth a "surplus" account without distinguishing between capital surplus and earned surplus. Such distinction would be required in the case of a registered investment company.18 The record shows that in the year 1940 the applicant paid out in dividends an amount substantially more than its net income. It does not appear whether or not the stockholders were furnished with a written statement disclosing the source of the dividend, as would be required by Section 19 of the Act, or whether such source was in fact earned surplus or capital surplus. In this connection we may also note that the statement of the applicant's surplus account would be subject to the rules and regulations under the Act which require that, under certain circumstances, a reserve be set up for unrealized depreciation in value of securities held.1 In view of all the foregoing, we must deny the application under Section 6 (c) for total exemption from the Act. However, in view of the relatively inactive status of the company at the present time, we find that it would be appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act to exempt the applicant partially from the provisions of subsections (b) and (d) of Section 30, to the extent that it need not issue or file the reports and statements required by those subsections more often than annually; provided, that we shall reserve jurisdiction to reconsider such partial exemption at any time, and to terminate it by further order, after notice and opportunity for hearing, if we find that such termination is warranted by changed circumstances. An appropriate order will issue. By the Commission: (Chairman Purcell and Commissioners Healy, Pike, Burke, and O'Brien). 13 Regulation S-X, Rule 6-02 (caption 24) and Articles 11 and 12. 14 Regulation S-X, Rule 6-02 (captions 7, 22 and 24 (b)). [No. 1578] IN THE MATTER OF AMERICAN RAILWAYS CORPORATION, Applicant File No. 812-82. Promulgated June 17, 1942 (Investment Company Act of 1940-Sections 3 and 6) DECLARATION OF STATUS. Investment Company. Where company owns securities defined as "investment securities" having a value exceeding 40 percent of its total assets, although it had for many years owned and held securities without material change, held that such company is an investment company within the definition of Section 3 (a) (3) of the Investment Company Act of 1940. Exception of Company Primarily Engaged in Other Business. Upon application of an investment company for an order pursuant to Section 3 (b) (2) of Investment Company Act of 1940, where applicant has wholly owned subsidiary engaged in street railway business but derives bulk of income from investment securities having a value exceeding that of the subsidiary's securities, held that applicant is not primarily engaged in street railway business and that application must be denied. EXEMPTION OF INVESTMENT COMPANIES. Exemption under Section 6 (c). Upon application of an investment company for general exemption from Investment Company Act of 1940, in absence of special circumstances entitling it to general exemption, held that general exemption must be denied. Further held that certain partial exemptions will be granted subject to conditions. APPEARANCES: E. West Parkinson and Frances D. Lesser, of the Investment Company Division of the Commission. James C. Forsyth, of Wherry, Condon & Forsyth, for the American Railways Corporation. FINDINGS AND OPINION OF THE COMMISSION American Railways Corporation has filed an application for an order, pursuant to the provisions of Section 3 (b) (2) of the Investment Company Act of 1940, declaring it to be excepted from the definition of an investment company under that Act, and, in the event that such application be denied, for an order under Section 6 (c) exempting it unconditionally from the provisions of the Act. 11 S. E. C.-————I. C.-367 669 Subsequently the applicant added a further alternative request for an order exempting it from certain specified provisions of the Act.1 After due notice, a public hearing was held on the application before a trial examiner. Applicant waived proposed findings of fact and trial examiner's report, and oral argument was had before us. The applicant was organized in Delaware on June 7, 1933, as a result of the reorganization of The American Railways Company, a New Jersey corporation. The predecessor corporation was a subsidiary of American Electric Power Corporation. It held securities of a number of street railway and electric and gas utility companies. The applicant's principal assets on December 31, 1940, consisted of the following securities, none of which was listed on a national securities exchange: Peoples Railway Company common stock, 10,000 shares Iowa Public Service Company: $7 first preferred, 2,224 shares- $7 second preferred, 12,478 shares---. Scranton Transit Company: At market where available @ $1, 000, 000 232, 408 a 1, 247, 800 Per books - $1, 000, 000 222, 400 1,247, 800 460, 604 10, 853 25, 542 10, 206 3% second mortgage income bonds, $464,400.Miscellaneous No market. Peoples Transit Company (formerly The Peoples Railway Company) operates a street railway system in the city of Dayton, Ohio. Iowa Public Service Company is an electric and gas utility company and is also a public utility holding company registered as such pursuant to the provisions of the Public Utility Holding Company Act of 1935, The applicant has never made a public offering of its securities. Its bonds, debentures, and common stock were all issued to creditors and security holders of the predecessor company, with the exception of $666,700 principal amount of collateral trust bonds which were sold at a private sale to four individuals to defray reorganization expenses and provide cash for the payment of certain claims. Appli 1 Sections 8 (b), 13 (a) (1), (2) and (3), 20, 21, 23 (c), 30 (c), 30 (b) (1), 30 (d), 32 (a) and (b). The common stock of applicant's predecessor was owned by American Electric Power Corporation, which received all the common stock of the applicant in exchange therefor and for certain additional assets which it transferred to the applicant at the time of the reorganization. American Electric Power Corporation itself was reorganized in 1935. Its successor, Penn Western Gas and Electric Corporation, thereby became the owner of the common stock of the applicant. As part of a program for compliance with Section 11 of the Public Utility Holding Company Act of 1935, Penn Western distributed its holdings of stock of American Railways Corporation as a partial liquidating dividend in kind to its shareholders. At the same time, substantially all of its holdings of common stock of Iowa Public Service Company were also distributed to the same persons. Penn Western Gas & Electric Company, 3 S. E. C. 280 (1938). |