"Chairman Garrett of the SEC has advised me that this inquiry will begin at once. "Unless there is objection, I will direct that copies of the appropriate correspondence be introduced into the record. "In addition to the breakdown in reporting financial transactions, the GAO reported the Secretary was a year behind in preparing official minutes of Commission actions, and that other important records were either missing or incomplete. "The GAO also pointed out that in its view, the FPC improperly granted certain exemptions from the area ceiling rates established under the Natural Gas Act. "This afternoon, we will cover the Commission's recordkeeping provisions and the manner of granting exemptions from the area. rates." [The letters referred to follow:] CONGRESS OF THE UNITED STATES, HOUSE OF REPRESENTATIVES, SPECIAL SUBCOMMITTEE ON INVESTIGATIONS OF THE Hon. RAY GARRETT, Jr. DEAR MR. CHAIRMAN: As you know from my letter to you of August 14, 1974, the Special Subcommittee on Investigations has been looking into the Standards of Conduct and other matters pertaining to the internal administration of agencies under the jurisdiction of the House Committee on Interstate and Foreign Commerce. On behalf of the Subcommittee, I am now requesting that the Securities and Exchange Commission investigate securities trading activities by certain officials and administrative law judges of the Federal Power Commission. In a report dated September 13, 1974, the General Accounting Office points out that there has been an almost complete breakdown in the enforcement of the FPC's regulations designed to prevent conflicts of interest. (A copy of the report is enclosed.) In his testimony before this Subcommittee on Wednesday, September 25, 1974, the Chairman of the Commission acknowledged this was the case. This breakdown has manifested itself in two ways: First, the majority of the FPC officials and administrative law judges who are, by regulation, required to file periodic disclosures (FPC Form 498, copy enclosed) which provide information on employment and financial interests, have not done so for a number of years. Second, a review of the forms which have been filed has belatedly revealed that nineteen FPC employees had financial interests in the form of securities ownership, which constituted conflicts of interest under the FPC's regulations. As a result of the GAO investigation, the FPC is requiring all of its employees who are required to file disclosures of financial interests to comply with the Commission's regulations in that regard. My understanding is that these forms are now in hand at the Commission, or soon will be, and that they are being reviewed. The possibility exists, therefore, that additional instances will be found wherein an FPC employee has financial interests which are prohibited by the FPC regulations. It should be noted that FPC Form 498, which is used for these disclosures of financial interest, is designed in such a way as to require inclusion of only those interests which are in effect as of the date that the form is executed. Therefore, these forms-which are, under Commission rules, supposed to be filed each year on June 30th-do not provide a complete record of all securities trading or ownership by these employees. This loophole could permit substantial securities trading to go unreported. The enforcement of the FPC's regulations prohibiting conflicts of interest is. of course, of no concern to your agency. I am concerned, however, that many of these individuals, because of their intimate knowledge of, and direct involvement in, FPC policy-making and decisions, may have the legal status of "insiders" as that term is contemplated in the securities laws. Certainly, the reporting loophole I pointed out above would permit such trading to go undetected. A review of the stocks owned by the nineteen Commission employees whose holdings have been revealed (see enclosure 3) shows substantial investment in companies whose activities are regulated by the Commission. Furthermore, there is a recurring appearance of the securities, of certain companies in the various portfolios which have been reviewed. The recurrences are not so striking as to strongly suggest a common investment scheme, and may be nothing more than coincidences arising from independent investment decisions made by the nineteen individuals in question. Nevertheless, for reasons which I shall state below, I believe it is essential that the trading activity of a number of officials at the FPC be reviewed so as to make certain that no violations of the Federal securities laws have taken place. This review, I believe, should be limited to FPC administrative law judges and officials in policy-making positions. This would include all employees required by the agency's regulations to file annual statements of financial interests on Form 498. A list of employees to whom this requirement applies can be obtained by your staff from the General Counsel of the Federal Power Commission. I believe the review should cover the period January 1, 1973 to date. In making this request, I do not mean to imply any accusations of wrongdoing. I recognize full well that the investigation which I am requesting will result in inconvenience to some employees of the FPC, the great majority of whom are conscientious and hard-working public servants. But public confidence in our Country's governmental regulatory processes has been grievously shaken by events of recent times. Recurrent reports of entertainment and special favors offered to and accepted by regulatory officials has further eroded the American people's trust and respect for its government. This widening atmosphere of cynicism has reached proportions which make it a threat to the continued health of our society. With this as background, the issuance of the recent report of the General Accounting Office concerning the breakdown in the enforcement of conflict of interest regulations in one of our most important and vital Federal agencies may have a further debilitating effect on the public's view of those who govern. It is therefore, in m view, essential that the public be assured in this instance that timely and effective remedial action is being taken, and that appropriate inquiries are being made to give assurance that possible violations of law are not being overlooked. Chairman, Special Subcommittee on Investigations, Committee on Interstate and Foreign Commerce, House of Representatives, Washington, D.C. DEAR CHAIRMAN STAGGERS: This is in response to your letter, dated September 30, 1974, in which you request the Commission to conduct an inquiry into "securities trading activities by certain officials and Administrative Law Judges of the Federal Power Commission." In a letter, dated October 2, 1974, a copy of which I understand you already have received, Chairman Nassikas, of the Federal Power Commission, has made a similar request. In addition, Chairman Nassikas has pledged his agency's full cooperation in any investigation undertaken by this Commission. I have enclosed a copy of my response to Chairman Nassikas' request for your information. As you correctly point out in your letter, "the enforcement of the Federal Power Commission's regulation prohibiting conflicts of interest is, of course, or no concern to [this Commission]." Nevertheless, as your letter goes on to state, 1 Not printed. officials of a governmental agency, such as the Federal Power Commission, because of their policy-making functions, and their access to policy-making decisions, may be "insiders" within the meaning of that term as employed in a number of court and administrative decisions under the antifraud provisions of the federal securities laws. The Commission, in response to your request, has directed its staff to commence an immediate investigation of the circumstances referred to in your letter. We plan to complete our investigation on whether any violations of the law may have been committed as promptly as is practicable. I hope the foregoing will be deemed to be full compliance with the Special Subcommittee's request to this agency. Sincerely, Enclosure.1 RAY GARRETT, Jr., Chairman. Mr. PICKLE. With the number of votes pending today, there is a possibility the chairman may wish to ask that the committee go over until in the morning, but that is subject to announcement by the end of the hearing this afternoon. In testimony at the last hearing, the chairman inserted, I believe, for the record, his entire statement. Though we do not have another member in the hearing room at this time, we may proceed bearing that in mind subject to any point of order, or you can hold up as you wish, Mr. Chairman. If we continue, do you have a statement to make at this time? FURTHER TESTIMONY OF HON. JOHN N. NASSIKAS, CHAIRMAN,, FEDERAL POWER COMMISSION, ACCOMPANIED BY FRANK C. ALLEN, CHIEF, BUREAU OF NATURAL GAS: GEORGE W. McHENRY, SOLICITOR; AND KENNETH F. LAMB, SECRETARY Mr. NASSIKAS. Yes. Mr. PICKLE. Do you have a written statement other than what was presented at the last hearing? Mr. NASSIKAS. My statement is the one the committee marked at the last hearing. It is a letter dated September 24, 1974, to Hon. Elmer Staats. This responds in detail to the General Accounting report. I also have additional information which I will try to assist the committee in understanding the situation and I hope to interpose this data also. If I may proceed, in light of Mr. PICKLE. Before you proceed, in reference to the letter dated September 24-this is the letter, I presume, that contains certain. charts which has 26 pages in the report? Mr. NASSIKAS. It has 35 pages, and all the enclosures are listed on page 35. There are appendixes (a) through (k) and various attachments. [See appendix I, p. 206, this hearing.] Mr. PICKLE. It is properly identified. You may proceed. Mr. NASSIKAS. In light of Chairman Staggers' opening statement, I would like to have one commentary if I may. I would like to request the committee's indulgence in also putting in evidence in this hearing my letter of October 2, 1974, to Chairman Staggers, which reads as follows: 1 Not printed. Your letter of September 30, 1974, was received in my office on October 2 after I had given instruction to deliver a letter to Chairman Ray Garrett of the Securities and Exchange Commission and a letter to you dated October 2, requesting a review of the trading activity of government officials referred to in the GAO Report. I have, of course, already indicated to Chairman Garrett that the SEC will have the full cooperation of the Federal Power Commission in conducting the SEC's review. I am in full accord with your requst to the Securities and Exchange Commission and trust that the report by the SEC will demonstrate that my faith in the integrity of the employees of this Commission has not been misplaced. I also have a letter to me acknowledging I have requested an investigation as well as Chairman Staggers. Mr. PICKLE. Both those letters will be received into the record. [The letters referred to follow :] FEDERAL POWER COMMISSION, Washington, D.C., October 2, 1974. Hon. HARLEY O. STAGGERS, DEAR MR. CHAIRMAN: Enclosed is a copy of a letter forwarded on this date to Chairman Garrett of the Securities and Exchange Commission implementing your statement (Transcript, p. 6) that the Securities and Exchange Commission should examine the trading activity of the 19 government officials referred to in the GAO Report and my reply. While the results of my staff's initial investigation have not disclosed any unlawful activities as the result of the holding of prohibited securities, I believe the review by the Securities and Exchange Commission along the lines obtained in your opening statement at the hearings is desirable to assure that no substantive violations of Securities and Exchange Commission regulations have taken place. Sincerely, JOHN N. NASSIKAS, Chairman. FEDERAL POWER COMMISSION,. Hon. RAY GARRETT, Jr.,. Chairman, Securities and Exchange Commission, DEAR MR. CHAIRMAN: At hearings on September 25, 1974, before the Special Subcommittee on Investigations of the House Committee on Interstate and Foreign Commerce, Chairman Harley O. Staggers stated (Transcript, p. 6) that in order to assure the pubilc". . . that there has been no questionable stock trading on insider information, or other wrongful activity" that he was going to request the Securities and Exchange Commission to examine the trading activity of these government officials to rule out the possibility that any substantive violations of law have taken place." 66 I share Chairman Staggers' concern that a review of the securities holdings of government officials holding prohibited securities should be conducted by the Securities and Exchange Commission to make certain that there has been no violation of applicable Securities and Exchange Commission stock trading restrictions. Accordingly, I request that your Commission conduct an appropriate review of the prohibited securities holdings of the 19 officials identified in the General Accounting Office Report dated September 13. 1974, Chapter 6, and outlined in detail in Appendices E and F of my reply of September 24, 1974, to the GAO Report. I have also enclosed a "Legend Identifying the 19 Cases in which GAO Reports that Employees Hold Prohibited Securities" by case number identifying each of the 19 cases listed in Appendices E and F. If you require further information for your review, please advise so that I can secure whatever relevant information may be necessary to facilitate your examination. When you have completed your review. I would appreciate a report of your conclusions, with a copy of your report to be forwarded to Chairman Staggers for the information of the Special Subcommittee on Investigations. I have forwarded a carbon copy of this letter to Chairman Staggers. Sincerely, Enclosures: 1 Hon. JOHN N. NASSIKAS, JOHN N. NASSIKAS, Chairman. SECURITIES AND EXCHANGE COMMISSION, Chairman, Federal Power Commission, DEAR CHAIRMAN NASSIKAS: This is in response to your letter, dated October 2, 1974, requesting that this Commission "conduct an appropriate review of the prohibited securities holdings of 19 [FPC] officials identified in the General Accounting Office report, dated Septemebr 13, 1974, Chapter 6, and outlined in detail in Appendices E and F of [your] reply of September 24, 1974, to the GAO Report." By letter, dated September 30, 1974, the Honorable Harley O. Staggers, Chairman of the Special Subcommittee on Investigations of the House of Representatives Committee on Interstate and Foreign Commerce, made a similar request to this Commission. As reflected in the enclosed copy of a letter we have this day sent to Chairman Staggers, this Commission has determined to conduct an inquiry along the lines suggested by you and Chairman Staggers to determine whether any violations of the federal securities laws may have occurred in connection with certain securities transactions by officials of the Federal Power Commission. It is our intention to conclude the investigation as promptly as practicable. On behalf of the Commission, I should like to express our appreciation for your offer to cooperate fully with such an investigation. Sincerely, RAY GARRETT, Jr., Chairman. Mr. NASSIKAS. I will summarize in the interest of time, Mr. Chair man. Simply turning to the first page of my letter to start with, to Mr. Staats, I state Mr. PICKLE. Mr. Chairman, I am sorry I have to interrupt you. In view of the fact that we have just had the bell and it is a yea and nay vote, before you get into your statement, I believe it would be better if we had a recess, for 10 minutes and I will try to fetch back a member. This committee will stand in recess for 10 minutes. [Brief recess.] Mr. PICKLE. The committee will resume its hearing. Mr. NASSIKAS. I will summarize. On the first page I point out this is an initial response to the report of the General Accounting Office and I will make such further response as may be necessary upon completion of our review. I might add that we have a continuing review of all substantive issues involved and procedural issues. I think I should point out that the report was released to the press in time for coverage in the Sunday, September 15 edition of the New York Times and subsequent coverage by other media. Although my letter of July 19. commenting on the draft report of June 26, 1974, was printed with Mr. Staats' initial report of September 13, 1974, I did not have an opportunity to reply officially to his report until after I had read the press releases and received the report on a Tuesday, although it was delivered to the FPC on a Monday, 3 days after it was released to the press. 1 Not printed. |