Exemption of Issuance and Sale of Securities By Public-Utility and Nonutility Subsidiary Companies of Registered Public-Utility Holding Companies

Proposed Rules

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 250

[Release No. 35-26312, File No. S7-11-95]

RIN 3235-AG45

Exemption of Issuance and Sale of Securities By Public-Utility

and Nonutility Subsidiary Companies of Registered Public-Utility

Holding Companies

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Commission, which today amended rules 45 and 52 under the

Public Utility Holding Company Act of 1935 (``Act''), is requesting

comment on further amendments. The proposed amendment to rule 52 would

permit a subsidiary company of a registered company to issue and sell

any security without the need to apply for, or receive, prior

Commission approval, where the conditions of the rule are met. The

Commission is proposing a conforming amendment to rule 45 with respect

to the guaranty of securities. These amendments are intended to

eliminate unnecessary regulatory burdens and paperwork associated with

seeking Commission approval for routine financings by companies in a

registered holding company system.

DATES: Comments must be submitted on or before September 26, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

N.W., Mail Stop 6-9, Washington, D.C. 20549. Comment letters should

refer to File No. S7-11-95. All comment letters received will be

available for public inspection and copying in the Commission's Public

Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.

FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate Director,

Joanne C. Rutkowski, Assistant Director, or Bonnie Wilkinson, Staff

Attorney, all at (202) 942-0545, Office of Public Utility Regulation,

Division of Investment Management, Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C. 20549.

c

Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.

FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate Director,

Joanne C. Rutkowski, Assistant Director, or Bonnie Wilkinson, Staff

Attorney, all at (202) 942-0545, Office of Public Utility Regulation,

Division of Investment Management, Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is requesting comment on

proposed amendments to rules 45 and 52 (17 CFR 250.45 and 250.52) under

the Public Utility Holding Company Act of 1935 [15 U.S.C. 79 et seq.].

Rule 52 has exempted from the requirement of prior Commission approval

under section 6(a) the issuance and sale of certain specified types of

securities by any subsidiary company of a registered holding company,

in accordance with the terms and conditions of the rule. The proposed

amendment to rule 52 would broaden the scope of the rule to exempt all

types of securities issued and sold by such subsidiary companies,

subject to satisfying the other conditions of the rule. A conforming

change to rule 45 is also being proposed to conditionally exempt from

the requirement of prior Commission approval under section 12(b) any

guaranty by a subsidiary company of debt securities issued by any other

subsidiary company.

The Commission is also proposing to rescind the statements of

policy with respect to first mortgage bonds and preferred stock

(``Statements of Policy'') and seeks comment on this proposal.\1\

\1\ Holding Co. Act Release Nos. 13105 and 13106 (Feb. 16,

1956), as amended in Holding Co. Act Release Nos. 16369 (May 8,

1969) and 16758 (June 22, 1970).

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Introduction

the statements of

policy with respect to first mortgage bonds and preferred stock

(``Statements of Policy'') and seeks comment on this proposal.\1\

\1\ Holding Co. Act Release Nos. 13105 and 13106 (Feb. 16,

1956), as amended in Holding Co. Act Release Nos. 16369 (May 8,

1969) and 16758 (June 22, 1970).

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Introduction

Rule 52 exempts from the requirement of prior Commission

authorization under section 6(a) the issue and sale of certain

specified types of securities by both public-utility and nonutility

subsidiary companies of registered public-utility holding companies.\2\

Rule 52 also exempts from the requirement of prior Commission

authorization under section 9(a)(1) the acquisition by a company in a

registered holding company system of any securities issued by any

associate company pursuant to the rule.\3\

\2\ Section 6(a) requires Commission approval under the

standards of section 7 of the issue and sale of any security of a

registered holding company or its subsidiary company.

Section 6(b) authorizes the Commission to exempt from the

declaration requirements of section 6(a):

the issue or sale of any security by any subsidiary company of a

registered holding company, if the issue and sale of such security

are solely for the purpose of financing the business of such

subsidiary company and have been expressly authorized by the State

commission of the State in which such subsidiary company is

organized and doing business. * * *

aration requirements of section 6(a):

the issue or sale of any security by any subsidiary company of a

registered holding company, if the issue and sale of such security

are solely for the purpose of financing the business of such

subsidiary company and have been expressly authorized by the State

commission of the State in which such subsidiary company is

organized and doing business. * * *

In section 6(a), the Congress intended ``to exempt the issue of

securities by subsidiary companies in cases where holding company

abuses are unlikely to exist.'' H.R. Conf. Rep. No. 1903, 74th

Cong., 1st Sess. 66-67 (1935). See generally Holding Co. Act Release

No. 25058 (Mar. 9, 1990), 55 FR 11362 (Mar. 28, 1990) (adopting rule

52), and Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR

31120 (July 14, 1992) (amending rule 52).

\3\ Section 9(a)(1) requires prior Commission approval under the

standards of section 10 for the acquisition of securities by a

registered holding company or its subsidiary company. Section

9(c)(3) provides a limited exception from this requirement for the

acquisition of:

such commercial paper and other securities, within such

limitations, as the Commission may by rules and regulations or order

prescribe as appropriate in the ordinary course of business of a

registered holding company or subsidiary company thereof and as not

detrimental to the public interest or the interest of investors or

consumers.

ital of that associate company. To qualify for exemption under rule

52, the issue and sale must be solely for the purpose of financing the

business of the subsidiary company and, if the subsidiary company is a

public-utility company, must be expressly authorized by the relevant

state commission.

\4\ See fn. 2, supra.

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The Commission is today proposing a further amendment to rule 52 to

exempt the issue and sale of any security by a subsidiary company in a

registered holding company where the conditions of the rule are

otherwise met. This additional change is intended to eliminate unneeded

regulation of routine financings by existing subsidiaries of a

registered holding company. The Commission is also proposing a further

change to rule 45 to conform the exemption from section 12(b), which is

provided by rule 45, to the exemption from section 6(a), which is

provided by rule 52. Such a conforming amendment is necessary because a

guaranty may be both a security under section 6(a) and an extension of

credit under section 12(b).

The Commission is also proposing to rescind the Statements of

Policy.

Discussion

In the 1992 release inviting comments on the proposed amendment to

rule 52, adopted today, the Commission requested comments on whether

the exemption under rule 52 should also be extended to exempt financing

transactions involving other securities, in particular guaranties of

debt securities issued by other subsidiary companies.

All of the registered holding companies commenting on the proposed

amendment 5 favored extending the exemption to other types of

securities, including guaranties. Guaranties by parent companies are

frequently used in conjunction with borrowings by their subsidiary

companies, and have been approved by order in countless

instances.6 Depending on materiality, such guaranties are required

to be disclosed in financial statements

panies commenting on the proposed

amendment 5 favored extending the exemption to other types of

securities, including guaranties. Guaranties by parent companies are

frequently used in conjunction with borrowings by their subsidiary

companies, and have been approved by order in countless

instances.6 Depending on materiality, such guaranties are required

to be disclosed in financial statements. Further, as several commenters

noted,7 guaranties of affiliate company obligations by public-

utility companies are subject to public utility commission approval in

many states.

\5\ The registered holding companies submitting comments were

American Electric Power Company, Inc. (``AEP''), Allegheny Power

System, Inc. (``APS''), Consolidated Natural Gas Company (``CNG''),

Central and South West Corporation, Eastern Utilities Associates,

General Public Utilities Corporation (``GPU''), and New England

Electric System.

\6\ See, e.g., Eastern Utilities Assocs., Holding Co. Act

Release No. 26266 (April 5, 1995)(guaranty by parent holding company

of obligations of nonutility subsidiary); American Electric Power

Co., Holding Co. Act Release No. 26267 (April 5, 1995)(same); Jersey

Central Power & Light Co., Holding Co. Act Release No. 26246 (March

6, 1995)(guaranty by utility of payment obligations on preferred

limited partnership interests of investment subsidiary); and

Southern Co., Holding Co. Act Release No. 26221 (Jan. 25,

1995)(guaranty by holding company of debt, lease obligations and

installment purchase obligations of nonutility subsidiary).

\7\ AEP 3 and GPU at 4.

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anty by utility of payment obligations on preferred

limited partnership interests of investment subsidiary); and

Southern Co., Holding Co. Act Release No. 26221 (Jan. 25,

1995)(guaranty by holding company of debt, lease obligations and

installment purchase obligations of nonutility subsidiary).

\7\ AEP 3 and GPU at 4.

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Several commenters 8 also supported expansion of rule 52 to

exempt other categories of securities, particularly in the context of

nonutility subsidiary financings. One holding company,9 for

example, noted the widespread use of partnership interests and other

types of securities in nonutility financing, particularly in the

context of project finance, and recommended the inclusion of such

securities in rule 52(b).10 The Commission is aware that a

majority of states now have adopted limited liability company statutes

which create a hybrid between partnerships and corporations.11

This is an increasingly popular form of business enterprise. Based upon

the Commission's experience in recent years with individual

applications, it is clear that the kinds and types of securities issued

by nonutility subsidiaries, including independent power subsidiaries,

tend to vary more than those issued by public-utility subsidiaries.

\8\ See generally AEP at 3, APS at 2, and CNG at 3.

\9\ GPU at 3.

\10\ Many of the nonutility investments approved by the

Commission in recent years have involved joint ventures with

nonassociate companies. It is almost always desirable for the joint

venture partners to invest directly or indirectly in an entity (such

as a partnership) which for federal and state income tax purposes is

treated as a partnership, rather than as a corporation, so that the

income, loss and credits associated with the business can be

reported directly by the joint venture partners

ntures with

nonassociate companies. It is almost always desirable for the joint

venture partners to invest directly or indirectly in an entity (such

as a partnership) which for federal and state income tax purposes is

treated as a partnership, rather than as a corporation, so that the

income, loss and credits associated with the business can be

reported directly by the joint venture partners.

\11\ We understand that limited liability companies may be

treated for tax purposes as partnerships, rather than taxed as

corporations.

The Commission is proposing to amend rule 52 to conditionally

exempt the issue and sale of all types of securities by public-utility

and nonutility subsidiaries alike. Because of the extensive reporting

requirements imposed by the Act and other federal securities laws, and

the far greater scrutiny of reporting companies since the passage of

the Act sixty years ago, the Commission believes that it may be

appropriate to condition the exemption under rule 52 solely by

reference to the literal requirements of section 6(b), without regard

to the form of the security issued.

In this connection, the Commission notes that it has exercised

jurisdiction under sections 6(a) and 7 of the Act over interest rate

swap agreements and related instruments.\12\ Comment is requested on

the extent, if any, to which such transactions should be excluded from

the rule proposed today.

\12\ These related instruments include products referred to as

interest rate caps, floors and collars. Registered holding companies

and subsidiaries have been using such instruments to limit the range

within which the interest rate on the debt underlying such

instrument will vary.

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luded from

the rule proposed today.

\12\ These related instruments include products referred to as

interest rate caps, floors and collars. Registered holding companies

and subsidiaries have been using such instruments to limit the range

within which the interest rate on the debt underlying such

instrument will vary.

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The Commission is also considering whether compliance with rule

52(b)(2) \13\ should be required in situations where a nonutility

subsidiary of a registered holding company issues a security that is

acquired by another nonutility subsidiary in the same holding company

system. Comment is requested on whether rule 52(b)(2) should be amended

to create an exception for such situations.

\13\ Rule 52(b)(2) requires that the interest rate and maturity

date of a debt security issued by a nonutility company to an

associate company be designed to parallel the effective cost of

capital of the associate company.

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A guaranty of debt securities issued by another subsidiary company

is itself a security under the Act,\14\ the issuance and sale of which

is subject to the declaration requirement of section 6(a), unless

exempted under section 6(b). In addition, the guaranty by a subsidiary

company of any obligation of another subsidiary company is subject to

section 12(b) and rule 45(a) thereunder.\15\ An agreement to assume

joint liability, as co-maker or otherwise, with respect to the

indebtedness of another company is the functional equivalent of a

guaranty, and is also subject to both sections 6(a) and 12(b).

\14\ See Holding Company Act section 2(a)(16)(definition of

security), 15 U.S.C. 79b(a)(16).

\15\ Section 12(a) prohibits the guaranty by subsidiary

companies of debt issued by a registered holding company. 15 U.S.C.

79l(a).

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he functional equivalent of a

guaranty, and is also subject to both sections 6(a) and 12(b).

\14\ See Holding Company Act section 2(a)(16)(definition of

security), 15 U.S.C. 79b(a)(16).

\15\ Section 12(a) prohibits the guaranty by subsidiary

companies of debt issued by a registered holding company. 15 U.S.C.

79l(a).

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Rule 45(a), with exceptions not relevant here, prohibits the

issuance of guaranties and similar undertakings by a subsidiary company

without the filing of a declaration.\16\ We believe, however, that any

guaranty or similar undertaking with respect to the indebtedness of

another subsidiary company that is issued pursuant to the exemption

provided by rule 52 should itself be exempt under rule 45. Accordingly,

we are proposing to add a new paragraph to rule 45(b) to conform the

related exemptions.\17\

\16\ At present, rule 45(b)(6) exempts certain guaranties ``in

the ordinary course of business.'' The rule by its terms does not

apply to a guaranty of a subsidiary's indebtedness for borrowed

money.

\17\ Under our proposal, it is possible that a subsidiary

company providing a guaranty may be exempt from section 12(b) by

reason of the proposed amendment to rule 45, but fail to satisfy the

conditions for exemption from section 6(a) provided by rule 52.

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o a guaranty of a subsidiary's indebtedness for borrowed

money.

\17\ Under our proposal, it is possible that a subsidiary

company providing a guaranty may be exempt from section 12(b) by

reason of the proposed amendment to rule 45, but fail to satisfy the

conditions for exemption from section 6(a) provided by rule 52.

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In connection with the amendments to rules 52 and 45 adopted today

by the Commission, some commenters have expressed concern that public-

utility subsidiaries of registered holding companies and their

customers need protection from the financial effects of financing

transactions, particularly in the context of nonutility ventures that

are not otherwise subject to effective state oversight.\18\ The

proposed expansion of the exemptions under rules 52 and 45 may heighten

these concerns, and the Commission seeks the views of all parties on

these issues. As a result, the Commission requests comments as to

whether protection is needed and, if so, what form it should take.

Commenters are invited to address the need for limitations based on (a)

the registered holding company system's capitalization ratios; (b) the

financial condition of the registered holding company system; (c) the

extent of past losses incurred by registered holding companies in

connection with past nonutility ventures; and (d) any other basis

specified by the commenter. The Commission also seeks

comment on whether the rules should incorporate any requirements of

notice to interested state commissions of the consummation of financing

by nonutility subsidiaries of registered holding companies.

\18\ See the discussion of the comments of the City of New

Orleans in the companion release published today in the Federal

Register.

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ther the rules should incorporate any requirements of

notice to interested state commissions of the consummation of financing

by nonutility subsidiaries of registered holding companies.

\18\ See the discussion of the comments of the City of New

Orleans in the companion release published today in the Federal

Register.

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The Commission also proposes to rescind the Statements of Policy.

The Statements of Policy were formulated by the Commission's staff

nearly forty years ago to specify the terms to be included in new

issues of first mortgage bonds and preferred stock. As the securities

markets have developed, the Commission has found that the Statements of

Policy have become anachronistic and hinder the ability of registered

companies to raise capital. As a result, the Commission has permitted

more and more deviations on a case-by-case basis from the requirements

of the Statements of Policy.19 In addition, in 1992, for similar

reasons, the Commission eliminated compliance with the Statements of

Policy as a condition to use of Rule 52.20 The Commission believes

that it is no longer appropriate to require specific terms to be

included in securities issues, and requests comment on this proposed

rescission.

\19\ See, e.g., Georgia Power Co., Holding Co. Act Release No.

25033 (Feb. 7, 1990)(authorizing deviation from redemption

provisions required by Statement of Policy for first mortgage

bonds), and System Energy Resources, Inc., Holding Co. Act Release

No. 24318 (Feb. 18, 1987) (authorizing charter amendment with

earnings coverage requirement different from Statement of Policy for

preferred stock). The Statements of Policy themselves contemplate

that ``deviations from these standards should be permitted in

appropriate cases.'' Holding Co. Act Release Nos. 13105 and 13106

(Feb. 16, 1956).

\20\ Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR

31120 (July 14, 1992)

orizing charter amendment with

earnings coverage requirement different from Statement of Policy for

preferred stock). The Statements of Policy themselves contemplate

that ``deviations from these standards should be permitted in

appropriate cases.'' Holding Co. Act Release Nos. 13105 and 13106

(Feb. 16, 1956).

\20\ Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR

31120 (July 14, 1992).

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Conclusion

The Commission believes that the registered holding-company systems

should have a greater ability to engage in routine financings without

the regulatory burden of prior Commission authorization, and that this

may be done without jeopardizing the interests the Act is designed to

protect. The rule amendments proposed today are intended to accomplish

this purpose.

Regulatory Flexibility Act Certification

Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5

U.S.C. 605(b), the Chairman of the Commission has certified that the

proposed amended rules will not, if adopted, have a significant

economic impact on a substantial number of small entities. This

certification, including the reasons therefor, may be obtained from

Bonnie Wilkinson, Office of Public Utility Regulation, Division of

Investment Management, Securities and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Costs and Benefits

It appears that amended rules 45 and 52 will substantially decrease

regulatory compliance costs for the registered holding companies.

Paperwork Reduction Act

The proposed amendment is subject to the Paperwork Reduction Act of

1980 (44 U.S.C. 79 et seq.) and will be submitted to the Office of

Management and Budget for approval.

Statutory Authority

The Commission is proposing to amend rules 45 and 52 pursuant to

sections 6, 9, 12 and 20 of the Act.

List of Subjects in 17 CFR Part 250

Electric utilities, Holding companies, Natural gas, Reporting and

recordkeeping requirements, Securities.

erwork Reduction Act of

1980 (44 U.S.C. 79 et seq.) and will be submitted to the Office of

Management and Budget for approval.

Statutory Authority

The Commission is proposing to amend rules 45 and 52 pursuant to

sections 6, 9, 12 and 20 of the Act.

List of Subjects in 17 CFR Part 250

Electric utilities, Holding companies, Natural gas, Reporting and

recordkeeping requirements, Securities.

Text of Proposed Rules

For the reasons set forth in the preamble, Part 250 of chapter II,

title 17, of the Code of Federal Regulations is proposed to be amended

as follows:

PART 250--GENERAL RULES AND REGULATIONS, PUBLIC UTILITY HOLDING

COMPANY ACT OF 1935

1. The authority citation for part 250 continues to read as

follows.

Authority: 15 U.S.C. 79c, 79f(b), 79i(c)(3), 79t, unless

otherwise noted.

2. Section 250.45 is amended by adding paragraph (b)(7) to read as

follows:

Sec. 250.45 Loans, extensions of credit, donations and capital

contributions to associate companies.

* * * * *

(b) Exceptions. * * *

(7) An agreement by any subsidiary company of a registered holding

company to assume liability (as guarantor, co-maker, indemnitor, or

otherwise) with respect to any security issued by any other subsidiary

company in the same holding company system, provided that the issuance

and sale of such security is exempt from the declaration requirements

of section 6(a) of the Act (15 U.S.C. 79f(a)) pursuant to Sec. 250.52.

3. Section 250.52 is amended by revising paragraphs (a) and (b) to

read as follows:

Sec. 250.52 Exemption of issue and sale of certain securities.

rity issued by any other subsidiary

company in the same holding company system, provided that the issuance

and sale of such security is exempt from the declaration requirements

of section 6(a) of the Act (15 U.S.C. 79f(a)) pursuant to Sec. 250.52.

3. Section 250.52 is amended by revising paragraphs (a) and (b) to

read as follows:

Sec. 250.52 Exemption of issue and sale of certain securities.

(a) Any registered holding-company subsidiary which is itself a

public-utility company shall be exempt from section 6(a) of the Act (15

U.S.C. 79f(a)) and rules thereunder with respect to the issue and sale

of any security, of which it is the issuer if:

(1) The issue and sale of such security are solely for the purpose

of financing the business of such public-utility subsidiary company;

(2) The issue and sale of such security have been expressly

authorized by the state commission of the state in which such

subsidiary company is organized and doing business; and

(3) The interest rates and maturity dates of any debt security

issued to an associate company are designed to parallel the effective

cost of capital of that associate company.

(b) Any subsidiary of a registered holding company which is not a

holding company, a public-utility company, an investment company, or a

fiscal or financing agency of a holding company, a public-utility

company or an investment company shall be exempt from section 6(a) of

the Act (15 U.S.C. 79f(a)) and rules thereunder with respect to the

issue and sale of any security, of which it is the issuer if:

(1) The issue and sale of such security are solely for the purpose

of financing the existing business of such subsidiary company; and

al or financing agency of a holding company, a public-utility

company or an investment company shall be exempt from section 6(a) of

the Act (15 U.S.C. 79f(a)) and rules thereunder with respect to the

issue and sale of any security, of which it is the issuer if:

(1) The issue and sale of such security are solely for the purpose

of financing the existing business of such subsidiary company; and

(2) The interest rates and maturity dates of any debt security

issued to an associate company are designed to parallel the effective

cost of capital of that associate company.

* * * * *

Dated: June 20, 1995.

By the Commission.

Jonathan G. Katz,

Secretary.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-15837 Filed 6-27-95; 8:45 am]

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