95-15836. Exemption of Issuance and Sale of Certain Securities by Public Utility and Nonutility Subsidiary Companies of Registered Public Utility Holding Companies; Exemption of Acquisition by Companies in a Registered Public Utility Holding Company ...  

  • [Federal Register Volume 60, Number 124 (Wednesday, June 28, 1995)]
    [Rules and Regulations]
    [Pages 33634-33639]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 95-15836]
    
    
    
    
    [[Page 33633]]
    
    _______________________________________________________________________
    
    Part VIII
    
    
    
    
    
    Securities and Exchange Commission
    
    
    
    
    
    _______________________________________________________________________
    
    
    
    17 CFR Part 250, et al.
    
    
    
    Exemption of Issuance and Sale of Certain Securities by Public 
    Utilities and Nonutility Subsidiary Companies, etc.; Final Rule and 
    Proposed Rules
    
    Federal Register / Vol. 60, No. 124 / Wednesday, June 28, 1995 / 
    Rules and Regulations 
    [[Page 33634]] 
    
    SECURITIES AND EXCHANGE COMMISSION
    
    17 CFR Part 250
    
    [Release No. 35-26311, File No. S7-17-92]
    RIN 3235-AF49
    
    
    Exemption of Issuance and Sale of Certain Securities by Public 
    Utility and Nonutility Subsidiary Companies of Registered Public 
    Utility Holding Companies; Exemption of Acquisition by Companies in a 
    Registered Public Utility Holding Company System of Certain Securities 
    of Associate Companies; Exemption of Capital Contributions and Open 
    Account Advances, Without Interest, by Parent Companies to Subsidiary 
    Companies
    
    AGENCY: Securities and Exchange Commission.
    
    ACTION: Final rule.
    
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    SUMMARY: The Commission is amending rule 52, which exempts certain 
    financing transactions involving the securities of the public utility 
    subsidiary companies of a registered public utility holding company 
    from the requirement of prior Commission approval under the Public 
    Utility Holding Company Act of 1935 (``Act''). As amended, the rule 
    will exempt certain additional types of securities, and will exempt the 
    issuance and sale of certain types of securities of nonutility 
    subsidiary companies of a registered holding company in connection with 
    routine financing transactions. The Commission is also amending rule 
    45(b)(4) to exempt from the requirement of prior Commission 
    authorization under section 12(b) of the Act and rule 45(a) all capital 
    contributions and open account advances by a parent company to its 
    subsidiary company. These amendments are intended to eliminate 
    unnecessary regulatory and paperwork burdens associated with seeking 
    Commission approval for routine financings by registered holding 
    companies and their subsidiary companies.
    
    EFFECTIVE DATE: June 28, 1995. These amended rules are substantive 
    rules that grant an exemption or relieve restrictions.\1\
    
        \1\ 5 U.S.C. 553(d)(1).
    
    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, 
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    450 Fifth Street, NW, Washington, DC 20549.
    
    SUPPLEMENTARY INFORMATION: Rule 52 (17 CFR 250.52) exempts from the 
    requirement of prior Commission approval under section 6(a) the 
    issuance and sale of certain specified types of securities by a public 
    utility subsidiary of a registered holding company, subject to the 
    terms and conditions of the rule. Rule 52 also exempts from the 
    requirement of prior Commission authorization under section 9(a) the 
    acquisition by a parent holding company of the securities issued by an 
    existing public utility subsidiary pursuant to the rule. The Commission 
    is amending rule 52 to broaden the types of debt securities that may be 
    issued in reliance upon the exemption and to make the exemption 
    available to nonutility subsidiaries of a registered holding company in 
    connection with routine financing transactions. The Commission is also 
    amending rule 45 (17 CFR 250.45) to exempt from the requirement of 
    prior Commission authorization under section 12(b) of the Act and rule 
    45(a) capital contributions and open account advances by a parent 
    company to its subsidiary companies. The Commission proposed these 
    amendments by release issued on July 7, 1992.\2\
    
        \2\ Holding Co. Act Release No. 25574 (July 7, 1992), 57 FR 
    31156 (July 14, 1992) (``Proposing Release'').
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        In a companion release published today in the Federal Register, the 
    Commission is inviting public comment on a further amendment to rule 52 
    that would extend the exemption to all types of securities issued in 
    connection with routine financing transactions, provided that the 
    conditions of the rule are met. The Commission is also proposing a 
    conforming change to rule 45.
    
    Discussion
    
        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 public utility subsidiary companies of 
    registered holding companies.\3\ The rule also exempts from the 
    requirement of prior Commission authorization under section 9(a)(1) the 
    acquisition by a company in a registered system of any securities 
    issued by an existing public utility subsidiary pursuant to the 
    rule.\4\
    
        \3\ Section 6(a) requires Commission approval under the 
    standards of section 7 for 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 
    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.
    
        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. 
    19, 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).
        \4\ Section 9(a)(1) in pertinent part requires prior approval 
    under the standards of section 10 for an 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.
    
        The exemption under rule 52 does not apply to the issuance of 
    securities to form a new public utility subsidiary of a registered 
    holding company. See rule 52(c).
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        At present, the rule applies only with respect to the issuance of 
    common stock, preferred stock, mortgage bonds and notes issued to a 
    parent holding company, where the interest rate and maturity date of 
    the note is designed to parallel a debenture or preferred stock issued 
    by the parent. The issue and sale of such securities must be solely for 
    the purpose of financing the business of the public utility company, 
    and the relevant state commission must have expressly authorized the 
    financing transactions.
        Rule 45 prohibits registered holding companies and their 
    subsidiaries from lending or extending credit to, indemnifying, or 
    making any donation or capital contribution to a company in the same 
    holding company system, except in specified circumstances.\5\ The rule 
    provides exceptions from the general provision, including an exception 
    under rule 45(b)(4) for capital contributions or open account advances 
    without interest to any subsidiary in an [[Page 33635]] aggregate 
    amount of up to $50,000 in any calendar year, after deducting payments 
    during the year.
    
        \5\ Rule 45 was adopted under section 12(b), which provides 
    that:
    
        It shall be unlawful for any registered holding company or 
    subsidiary company thereof, by use of the mails or any means or 
    instrumentality of interstate commerce, or otherwise, directly or 
    indirectly, to lend or in any manner extend its credit to or 
    indemnify any company in the same holding-company system in 
    contravention of such rules and regulations or orders as the 
    Commission deems necessary or appropriate in the public interest or 
    for the protection of investors or consumers or to prevent the 
    circumvention of the provisions of this title or the rules, 
    regulations, or orders thereunder.
    
        Rule 45(a) requires the filing of a declaration and an order of 
    the Commission permitting the declaration to become effective in 
    order for a registered holding company or its subsidiary to engage 
    in these transactions.
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        On July 7, 1992, the Commission proposed amendments to rules 52 and 
    45(b)(4) under the Public Utility Holding Company Act of 1935 (15 
    U.S.C. 79 et seq.).\6\ The amendments would (a) broaden the types of 
    debt securities that may be issued by public utility subsidiaries in 
    reliance upon rule 52, (b) extend the exemption under rule 52 to 
    nonutility subsidiaries of registered holding companies, (c) revise the 
    conditions of rule 52 applicable to intrasystem loan transactions, and 
    (d) remove the annual dollar limitation from rule 45(b)(4).
    
        \6\ See the Proposing Release.
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        The Commission received comments submitted by or on behalf of seven 
    registered holding companies \7\ and by the Council of the City of New 
    Orleans and the National Association of Regulatory Utility 
    Commissioners (``NARUC''). While the registered holding companies 
    generally support adoption of the proposed amendments, New Orleans and 
    NARUC generally oppose the amendments. New Orleans urged that, in the 
    event the amendments are adopted, several additional conditions, 
    including incorporation of a consolidated debt/equity ratio applicable 
    to sales of securities by nonutility subsidiaries, should be included. 
    The Commission had invited comment on the need for such a limitation in 
    its notice of proposed rulemaking. The objections of New Orleans and 
    NARUC are discussed in greater detail in section 5, below.
    
        \7\ The registered holding companies submitting comments were 
    American Electric Power Company, Inc., Allegheny Power System, Inc. 
    (``APS''), Consolidated Natural Gas Company (``CNG''), Central and 
    South West Corporation (``CSW''), Eastern Utilities Associates, 
    General Public Utilities Corporation (``GPU''), and New England 
    Electric System.
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    1. Issue and Sale of Securities by Public Utility Subsidiaries
    
        Rule 52 currently exempts the issue and sale by a public utility 
    subsidiary of any common stock, preferred stock, mortgage bond or note 
    issued to a parent holding company. The rule currently has limited 
    usefulness. With respect to intrasystem loan transactions, the 
    exemption is available only for notes issued to a parent holding 
    company with interest rates and maturity dates that parallel those of 
    the holding company's debentures or preferred stock. This condition 
    prevents the use of the exemption in connection with other common forms 
    of intrasystem financing, such as unsecured short-term and long-term 
    loans, money pool arrangements, and the like, the terms of which are 
    not matched to an actual debenture or preferred stock issued by the 
    acquiring company.8 In addition, because none of the registered 
    electric utility holding companies currently issues debentures and 
    preferred stocks, their subsidiaries do not benefit from the exemption 
    at all in connection with down-stream loans. The Commission proposed to 
    amend the rule to extend the exemption to all types of debt 
    instruments, including bonds, notes and other forms of indebtedness 
    issued by the subsidiary, having interest rates and maturities designed 
    to parallel the effective cost of capital of the purchaser.9 All 
    of the holding companies submitting comments support a change that 
    would extend the benefits of rule 52 to all types of indebtedness.
    
        \8\ As noted in the Proposing Release, the omission of common 
    intrasystem financing transactions is of particular concern to the 
    registered gas systems. Unlike registered electric systems, these 
    systems typically issue and sell debt to the public at the parent 
    company level and fund their subsidiaries' operations by means of 
    capital contributions, open account advances, money pool 
    arrangements, purchases of common stock, and short- and long-term 
    loans.
        \9\ The Commission noted that it has permitted numerous 
    declarations to become effective for the issuance and sale of such 
    securities on this basis. See, e.g., Consolidated Natural Gas Co., 
    Holding Co. Act Release No. 25339 (June 28, 1991), 49 SEC Docket 449 
    (July 16, 1991), and Holding Co. Act Release No. 25110 (June 29, 
    1990), 46 SEC Docket 1124 (July 17, 1990) (cost to subsidiaries of 
    borrowing from parent registered holding company tied to Federal 
    Funds' rate for short-term debt and published bond index for long-
    term debt).
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        The Commission believes it is appropriate to expand the exemption 
    of rule 52 to include all types of debt securities 10 that may be 
    issued by utility subsidiaries, as proposed. The Commission believes 
    that this expanded exemption is appropriate in view of the continuing 
    requirement of express approval by the state commission of the state in 
    which the public utility is organized and doing business. In 1935, few 
    states exercised jurisdiction over public utility financing. Today, 
    most do, although the extent of such jurisdiction varies 
    greatly.11 Rule 52 will not apply to utility financings if a state 
    does not regulate financing, nor to a utility in a state which 
    regulates securities sales generally if such state chooses not to 
    regulate a particular type of security, such as short-term debt. CSW 
    and CNG ask the Commission to interpret section 6(b) to permit an 
    extension of the exemption under rule 52 to utility debt issuances 
    where the relevant state government has determined that such issuances 
    need not be reviewed by the state utility commission. Similarly, GPU 
    suggests an expansion of rule 52 to guaranties issued by a holding 
    company where no state commission approval is required. The Commission 
    declines to adopt these suggestions, as section 6(b) does not appear to 
    offer a basis for such action.
    
        \10\ In the Proposing Release, the Commission sought comment on 
    whether rule 52 should be extended to cover guaranties. However, the 
    rule as amended today will specifically exclude guaranties. As 
    discussed below, the Commission is requesting comment in a companion 
    release to be published today on the question of whether rule 52 
    should be further amended to cover issuance of all types of 
    securities, including guaranties.
        \11\ See National Association of Regulatory Utility 
    Commissioners Compilation of Utility Regulatory Policy in the United 
    States and Canada, 1993-94 Compilation (NARUC 1994), Tables 59A and 
    B (state jurisdiction with respect to the issue and sale of 
    securities by public-utilities).
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        In proposing the amendment to rule 52, the Commission contemplated 
    that the effective cost of capital for debt securities which have 
    recently been issued by the purchasing associate company will be the 
    coupon rate of interest plus all expenses, including, but not limited 
    to, underwriters' compensation, discounts, and fees and commissions 
    associated with the issue and sale of such debt; and that, in the event 
    the purchasing associate company has not recently issued debt 
    securities, the effective cost of capital may be tied to an appropriate 
    index such as, but not limited to, the Federal Funds' rate or a 
    published bond index. The Commission invited comment on whether other 
    factors should be considered in determining the effective cost of 
    capital of the purchasing associate company.
        APS suggests that filing fees, listing fees, counsel and 
    accountants' fees, Blue Sky survey fees, and transfer agent fees should 
    also be considered.12 The Commission agrees that all ordinary and 
    necessary costs of a debt offering should be considered.
    
        \12\ APS at 1.
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        CNG recommends that the Commission permit use of an appropriate 
    index to determine the effective cost of capital if the associate 
    company has issued debt securities in circumstances where the financing 
    terms are not comparable to the terms of the intrasystem loan.13 
    We believe that the language of the final rule is flexible enough to 
    permit use of a published rate or index in these circumstances.
    
        \13\ CNG at 2.
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    2. Issue and Sale of Securities by Nonutility Subsidiaries
    
        In the Proposing Release, the Commission noted the large volume of 
    debt securities sold by nonutility subsidiaries of registered holding 
    companies. The Commission proposed [[Page 33636]] to amend rule 52 to 
    encompass nonutility as well as utility subsidiaries. So doing, the 
    Commission noted that absent further amendment of the rule, routine gas 
    intrasystem financings would remain subject to the requirement of prior 
    approval.14
    
        \14\ The Commission noted that the nonutility operations of 
    registered gas holding companies rival in size the utility 
    operations, largely because the Act does not include transmission 
    assets in the definition of a gas utility company.
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        Section 6(b) provides that the Commission shall exempt the issue 
    and sale of a security of a nonutility subsidiary of a registered 
    holding company for the purpose of financing the subsidiary's business, 
    subject to such terms and conditions as the Commission deems 
    appropriate in the public interest or for the protection of investors 
    or consumers. In enacting section 6(b), Congress intended the 
    Commission ``to exempt the issue of securities by subsidiary companies 
    in cases where holding company abuses are unlikely to exist.15
    
        \15\ H. R. Conf. Rep. No. 1903, 74th Cong., 1st Sess. 66-67 
    (1935).
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        In the past, the Commission has granted exemptions for nonutility 
    financings by order on a case-by-case basis. The Commission, in 1989, 
    also considered an exemption by rule for such financings. In the 
    release proposing the original rule 52, the Commission deferred action, 
    citing its concern ``with the adverse consequences that potential 
    growth of debt in the nonutility subsidiary companies could have for 
    the holding-company system and the public utility subsidiaries.'' 
    16
    
        \16\ Holding Co. Act Release No. 24891 (May 17, 1989), 54 FR 
    22314 (May 23, 1989) (proposing rule 52).
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        Our experience since that time suggests to the Commission that a 
    case-by-case approach to nonutility financings is no longer necessary. 
    In addition, the extensive reporting requirements imposed on registered 
    holding company systems by the Act and other federal securities laws, 
    and the level of scrutiny of reporting companies by investors and by 
    the financial community suggest that the rule may appropriately 
    encompass nonutility as well as utility subsidiaries. All of the 
    registered holding companies submitting comments support expansion of 
    the rule to exempt routine nonutility subsidiary financings.
        GPU, noting the widespread use of partnership interests and other 
    types of securities in nonutility financing, particularly in the 
    context of project finance, recommends the inclusion of such securities 
    in rule 52(b).17 Because the Commission is proposing a further 
    amendment to rule 52 to extend the exemption of the rule to all types 
    of securities issued by subsidiary companies of a registered holding 
    company, so long as the other conditions of the rule are met, we do not 
    think it necessary to address the status of partnership interests 
    separately at this time.18
    
        \17\ GPU at 3.
        \18\ Filings with the Commission to date suggest that the kinds 
    and types of securities issued by nonutility subsidiaries, such as 
    independent power subsidiaries, will vary more than those issued by 
    public utility subsidiaries.
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        In the Proposing Release, the Commission invited comment on 
    whether, to avoid excess leveraging, the availability of the exemption 
    for security issuances of nonutility subsidiaries should be conditioned 
    upon a requirement that an issuance not cause the consolidated debt/
    equity ratio of the holding company system to exceed 65/30.19 None 
    of the commenting holding companies support such a measure. Most 
    observe that market forces affecting the parent holding company's 
    common stock, as well as the desire to maintain credit quality ratings 
    on public utility debt, will effectively deter management from over-
    leveraging the holding company capital structure.20
    
        \19\ The Commission noted that this condition is drawn from 
    section 7(d)(1), which requires the Commission, in reviewing an 
    issuance of securities, to consider whether the security is 
    reasonably adapted to the security structure of the company issuing 
    the security and the other companies in the registered holding 
    company system. Under that section, the Commission generally has 
    required a registered holding company system and its public utility 
    subsidiaries to maintain a 65/30 debt/common equity ratio, the 
    balance generally being preferred equity. Such a debt/equity 
    capitalization requirement was included in rule 52, as originally 
    adopted, as applied to securities issued by public utility 
    subsidiaries, but was eliminated in 1992.
        \20\ The Commission also notes the emphasis placed upon these 
    considerations in many comments received in response to our request 
    for comment concerning the modernization of regulation under the 
    Act. See Holding Co. Act Release No. 26153 (Nov. 2, 1994), 59 FR 
    55573 (Nov. 8, 1994).
        GPU notes that financing of independent power project subsidiaries 
    is typically non-recourse to other companies in the holding company 
    system, so that including such debt in a consolidated capitalization 
    ratio would overstate the exposure of the registered system. GPU also 
    states that the use of a consolidated debt/equity ratio would not be 
    consistent with the Commission's approval of higher debt ratios in 
    numerous project financing applications.21 New Orleans, however, 
    supported by NARUC, believes that such a consolidated capitalization 
    ratio is necessary if proposed rule 52(b) is adopted, which, as 
    previously indicated, these commenters oppose.
    
        \21\ GPU at 3-4.
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        Total investment by registered holding companies in nonutility 
    subsidiaries, to date, has not been significant in amount. As of 
    December 31, 1994, the registered holding companies had invested only 
    $1.1 billion (1.4% of over $80 billion of total capitalization) in all 
    energy-related businesses, exclusive of exempt wholesale generators, 
    foreign utility companies and gas holding company transportation and 
    supply operations.
        The Commission has concluded that it is unnecessary to condition an 
    exemption under rule 52(b) upon the maintenance of a consolidated debt/
    equity ratio of 65/30.22 We agree with the arguments of the 
    holding companies in this respect. We also note that the Commission 
    will continue to have jurisdiction over securities sales by registered 
    holding companies. The Commission will thus be able to monitor, on a 
    continuing basis, the effects of holding company financing on the 
    consolidated capital structure of the registered system.
    
        \22\ As in the case of a debt instrument issued by a public 
    utility subsidiary pursuant to the rule, the interest rates and 
    maturity dates of any debt security issued by a nonutility 
    subsidiary to an associate company would be required to parallel the 
    effective cost of capital of the associate company. See the 
    discussion supra, at 6-7, 8-9.
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        Because rule 52(c) currently exempts only acquisitions of 
    securities issued and sold by a public utility subsidiary, the 
    Commission proposed to amend rule 52 to extend the exemption to 
    acquisitions of securities of nonutility subsidiaries as well. The 
    Commission is adopting the proposed amendment. Paragraph (c) of the 
    rule, with this change, becomes paragraph (d).
        In a separate release, the Commission is today seeking comment on a 
    rule that would allow registered holding companies to diversify through 
    new or existing subsidiaries into certain categories of ``energy-
    related'' businesses, subject to financial and other limitations. In 
    this connection, the Commission intends to revisit rule 52(d) to 
    conform or limit its scope.
    
    3. Capital Contributions and Open Account Advances, Without Interest, 
    to Subsidiary Companies
    
        Rule 52, as amended, does not provide an exemption for certain 
    other common intrasystem financing transactions. For example, a capital 
    contribution from a registered holding company to any of its subsidiary 
    companies is regulated as an intercompany loan under section 12(b) 
    [[Page 33637]] and rule 45.23 Open account advances that do not 
    bear interest are also subject to these provisions.
    
        \23\ Section 12(b) and rule 45(a) generally require prior 
    Commission approval for a registered holding company or its 
    subsidiary company to ``lend or in any manner extend its credit to 
    or indemnify any company in the same holding-company system.''
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        To facilitate these transactions, the Commission proposed to amend 
    rule 45(b)(4), which exempts up to $50,000 in capital contributions and 
    open account advances, without interest, made to any subsidiary during 
    a calendar year, to remove the dollar limitation of the rule.24 
    All of the registered holding companies submitting comments support 
    this change. New Orleans proposes that, if rule 45(b)(4) is amended, it 
    should exempt capital contributions or open account advances subject to 
    an aggregate limitation of $1,000,000 per year.
    
        \24\ Rule 45(b)(4) exempts ``[c]apital contributions or open 
    account advances, without interest, to any subsidiary: Provided, 
    That after giving effect to the transaction the total net amount 
    which such subsidiary will have received during the calendar year as 
    a result of such transactions will not exceed $50,000 (after 
    deducting payments during the year regardless of the date of the 
    advances).'' The rule contained the $50,000 limitation when adopted 
    in 1941. Holding Co. Act Release No. 2694 (Apr. 21, 1941).
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        As the Commission noted in the Proposing Release, the legislative 
    history of the Act makes clear that the Congress, while concerned with 
    holding company abuses, recognized that ``[d]own-stream loans * * * may 
    be legitimate sources of credit * * *,'' and concluded that ``the 
    subject is one in which the rule-making power of the Commission is 
    required to meet a host of varying circumstances.'' 25 Capital 
    contributions and open account advances, without interest, are routine 
    transactions which serve to transfer funds from the parent to its 
    subsidiary. The amounts and types of securities issued by any 
    registered holding company, which remain subject to prior approval by 
    the Commission, must be justified by reference to the need for capital 
    infusions by its subsidiaries, both utility and nonutility. Financing 
    requests must be supported by capital budget projections covering the 
    authorization period. The Commission believes that its ability to 
    supervise intrasystem financing through these means will not be 
    compromised by removal of the dollar limitation in rule 45(b)(4). 
    Accordingly, the Commission declines to incorporate an aggregate dollar 
    limitation in the rule as adopted.26
    
        \25\ S. Rep. No. 621, 74th Cong., 1st Sess. 34-5 (1935).
        \26\ We also intend to revisit rule 45(b)(4) in the context of 
    any rulemaking on nonutility diversification.
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    4. Issuance of Other Securities
    
        Finally, the Commission sought comment on whether the amendments to 
    rules 45 and 52 should be extended to exempt financing transactions 
    involving other securities, in particular, guaranties of debt 
    securities issued by other subsidiary companies.27 Because 
    guaranties are securities under the Act,28 their issuance and sale 
    are subject to the declaration requirement of section 6, unless 
    exempted under section 6(b). At present, rule 52 does not extend to the 
    issuance and sale of guaranties.
    
        \27\ Section 12(a) prohibits the guaranty by subsidiary 
    companies of debt issued by a registered holding company.
        \28\ See section 2(a)(16) (definition of security).
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        In addition, the guaranty by a subsidiary company of debt 
    securities issued by another subsidiary company is subject to section 
    12(b) and rule 45 thereunder. Rule 45, with exceptions not relevant 
    here, prohibits the issuance of guaranties by a subsidiary company 
    without the filing of a declaration.29
    
        \29\ 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.
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        As previously indicated, we are publishing a companion release 
    inviting comment on a further amendment to rule 52 to exempt the 
    issuance of all types of securities. Accordingly, there is no need to 
    address guaranties separately at this time.
    
    5. Comments by the City of New Orleans and NARUC
    
        New Orleans opposes any expansion of the exemptions from the 
    Commission's pre-approval requirement for financings provided by rules 
    45(b)(4) and 52 which, the city contends, would ``widen the existing 
    regulatory gap between federal and state and local regulators.'' 
    30 New Orleans urges that, if the amendments are adopted, several 
    additional conditions need to be incorporated. Certain of these 
    additional conditions, or limitations on the availability of the 
    exemptions, have been discussed above. New Orleans states that these 
    conditions are generally necessary to protect public utility 
    subsidiaries of registered holding companies and their customers from 
    the financial effects of financing transactions, particularly in the 
    context of nonutility ventures that are not otherwise subject to 
    effective state oversight.
    
        \30\ New Orleans, Executive Summary, at 4-5.
        During the notice period inviting comment on the proposed 
    amendments to rules 45(b)(4) and 52, Congress passed the Energy Policy 
    Act of 1992.31 Title VII of the Energy Policy Act amended the Act 
    to permit investments by registered holding companies in ``exempt 
    wholesale generators'' (``EWGs'') and ``foreign utility companies'' 
    (``FUCOs''), defined in new sections 32 and 33, respectively.32 
    Those sections exempt EWGs and FUCOs from all provisions of the Act, 
    including sections 6(a), 7 and 12(b), which would otherwise apply to 
    securities and guaranties issued and sold by such entities. However, 
    these sections do not exempt issuance and sale of securities by a 
    registered holding company in cases where the proceeds will be used for 
    EWG or FUCO investments, and these financing transactions continue to 
    require Commission approval under sections 6(a) and 7. Under section 
    32, Congress directed the Commission to promulgate rules with respect 
    to actions which would be considered to ``have a substantial adverse 
    impact on the financial integrity of the registered holding company 
    system'' to ensure that actions (e.g., financings, guaranties, etc.) by 
    any registered holding company in respect of EWGs would not have any 
    adverse impact on any utility subsidiary or its customers or on 
    effective state regulation.33 Similarly, under section 33, 
    Congress directed the Commission to promulgate rules regarding 
    registered holding companies' acquisitions of interests in FUCOs which 
    shall provide for the protection of the customers of associate public 
    utility companies and the financial integrity of the holding company 
    system.34
    
        \31\ P.L. 102-486, 106 Stat. 2776 (1992).
        \32\ An EWG is defined in section 32(a) of the Holding Company 
    Act as any person determined by the Federal Energy Regulatory 
    Commission to be engaged exclusively in the business of owning and/
    or operating all or part of one or more facilities that are used for 
    the generation of electric energy, exclusively for sale at wholesale 
    or leased to a utility, and selling electric energy at wholesale. A 
    FUCO is defined in section 33(a) as any person that owns or operates 
    facilities outside the United States used for the generation, 
    transmission or distribution of electric energy for sale or for the 
    distribution at retail of natural or manufactured gas, that derives 
    no part of its income from such utility activities in the United 
    States and is not a public utility company operating in the United 
    States, and that provides notice to the Commission.
        \33\ See section 32(h)(6).
        \34\ See section 33(c)(1).
    ---------------------------------------------------------------------------
    
        The Commission had not yet initiated the rulemaking effort under 
    new sections 32 and 33 when it proposed the additional amendments to 
    rules 45(b)(4) and 52. In part for that reason, NARUC and New Orleans 
    both urged the Commission to delay any action on the proposed rules 
    pending development of consumer protection measures in the broader 
    context of investments in EWGs and FUCOs, which, for purposes of the 
    [[Page 33638]] Act, are nonutilities. However, since that time, several 
    related rules have been promulgated under the new provisions, and 
    others are pending.35 Those rules were intended to carry out the 
    Congressional mandates under sections 32 and 33.36 We note that 
    those rules are subject to a pending challenge by NARUC and 
    others.37
    
        \35\ See Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58 
    FR 51488 (Oct. 1, 1993).
        \36\ Rule 53 provides standards for the Commission to determine 
    whether to approve the issue or sale of a security by a registered 
    holding company, in cases where the proceeds of the financing will 
    be used to acquire an EWG. Rule 54 provides that the effect of EWG 
    and FUCO operations on the registered system will not be considered 
    in determining whether to approve any other transactions under the 
    Holding Company Act, if the standards of rule 53 are satisfied. 17 
    CFR 250.53 and 250.54.
        \37\ National Association of Regulatory Utility Commissioners, 
    et al. v. Securities and Exchange Commission, U.S. Court of Appeals 
    for the District of Columbia Circuit, No. 93-1778.
    ---------------------------------------------------------------------------
    
        The City of New Orleans recommends that the Commission consider the 
    proposed amendments in light of the Congressional mandates under 
    sections 32 and 33. We do not believe this measure is necessary. As 
    indicated, those provisions exempt EWGs and FUCOs from all provisions 
    of the Act, and the rules adopted under those sections are intended to 
    provide a means to ensure that investments by the holding company and 
    activities of the exempt subsidiaries have not adversely affected the 
    holding company or its utility customers. The proposed amendments to 
    rules 45(b)(4) and 52, in contrast, exempt only public utility 
    financing that has been reviewed and approved by state commissions, and 
    financing by nonutility subsidiaries (other than EWGs and FUCOs) that 
    is non-recourse to the holding company or any utility subsidiary. As a 
    result, the activities exempted by the proposed rule amendments are not 
    nearly so far-reaching as the EWG and FUCO provisions, and do not have 
    the same need for additional consumer protection. Further, and this 
    distinction appears critical, the acquisition by a registered holding 
    company of an interest in a new nonutility business, and any other 
    actions related thereto, such as the organization of a separate 
    subsidiary to conduct that business, the initial capitalization 
    thereof, intrasystem guaranties and any arrangements for the sale of 
    goods and services to the new subsidiary, are, in the absence of any 
    other applicable exemption, subject to the pre-approval process 
    required under applicable provisions of the Act, as well as to ongoing 
    reporting requirements and other requirements of the Act regarding 
    maintenance of books and records, audits, inspections and the like. 
    State commissions, consumer groups and other interested parties have 
    the opportunity to express their views regarding the likely effects of 
    nonutility ventures on consumers and other protected interests and to 
    propose safeguards appropriate in order to protect these interests in 
    connection with this pre-approval process.38
    
        \38\ Further, the amended rules do not create any new exemption 
    from the pre-approval process for guaranties by a registered holding 
    company of the securities or other obligations of any subsidiary.
    ---------------------------------------------------------------------------
    
        In addition to the modifications to the proposed rules mentioned 
    elsewhere in this release, New Orleans recommends that the rules, if 
    adopted, should require prior approval of a holding company's cost of 
    capital by each state and local commission which regulates the parent. 
    The Commission understands this request to involve approval by a 
    commission in each of the states in which the holding company's public 
    utility subsidiaries operate.39 Because the rules do not exempt 
    holding company financings from our approval, we see no useful purpose 
    to be achieved by requiring a multistate determination of a holding 
    company's cost of capital. The Commission is specifically obligated by 
    section 7(d) to consider the reasonableness of the fees, commissions 
    and other expenses of a securities issuance which would be relevant to 
    the determination of a holding company's effective cost of capital in 
    connection with our consideration of any holding company financing 
    applications.
    
        \39\ New Orleans at 15.
    ---------------------------------------------------------------------------
    
        New Orleans' suggestion that rule 52, as proposed to be amended, 
    also be conditioned upon a requirement for state commission approval in 
    every state in a holding company's service territory for any guaranty 
    is likewise misplaced.40 As previously stated, the rules do not 
    exempt registered holding companies from the requirement to obtain 
    Commission approval in connection with issuing any guaranty.
    
        \40\ New Orleans at 16.
        In summary, we do not believe that the proposed amendments to rules 
    45(b)(4) and 52 will compromise our ability to protect consumers and 
    investors, and we do not find that the additional conditions and 
    restrictions proposed by New Orleans are necessary for this purpose. We 
    are therefore adopting the proposed amendments to rules 45(b)(4) and 52 
    substantially in the form proposed.
    
    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 adopted today are consistent with those 
    two objectives.
    
    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. The 
    Commission did not receive any comments with respect to the Chairman's 
    certification.
    
    Costs and Benefits
    
        Amended rule 52 will substantially decrease regulatory compliance 
    costs for the registered holding companies. In calendar years 1993 and 
    1994, 122 applications would not have been filed, had the proposed 
    amended rule 52 been in place. Estimated savings per application would 
    have been approximately $30,000 including the $2,000 filing fee per 
    application, and related legal, accounting, and management costs. Thus, 
    for 122 applications filed in calendar years 1993 and 1994, the 
    aggregate savings would have been approximately $3,660,000 or 
    $1,830,000, respectively, per year. Moreover, the reduction in 
    Commission staff hours associated with reviewing and analyzing these 
    applications would have been approximately 5,700 hours per year (2.5 
    staff years). The only cost to the registered holding companies in 
    complying with the amended rule will be the cost of completing a Form 
    U-6B-2 after the issue or sale of any security. It is estimated that 
    approximately one hour will be required to complete each form at an 
    estimated cost of $100 per hour. Assuming 61 financing applications per 
    year, the cost of compliance reporting would approximate $6,100 per 
    year.
    
    Paperwork Reduction Act
    
        The proposed amended rules are subject to the Paperwork Reduction 
    Act of 1980 (44 U.S.C. 79 et seq.) and have been submitted to the 
    Office of Management and Budget for approval to use them through July 
    31, 1997. Final action is expected by June 23, 1995.
    
    Statutory Authority
    
        The Commission is amending rules 45 and 52 pursuant to sections 6, 
    9, 12 and 20 of the Public Utility Holding Company Act of 1935. 
    [[Page 33639]] 
    
    List of Subjects in 17 CFR Part 250
    
        Electric utilities, Holding companies, Natural gas, Reporting and 
    recordkeeping requirements, Securities.
    
    Text of Final Rules
    
        For the reasons set forth in the preamble, Part 250 of chapter II, 
    title 17, of the Code of Federal Regulations is 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 revising paragraph (b)(4) to read 
    as follows:
    
    
    Sec. 250.45  Loans, extensions of credit, donations and capital 
    contributions to associate companies.
    
    * * * * *
        (b) Exceptions. * * *
        (4) Capital contributions or open account advances, without 
    interest, by a company to its subsidiary company.
    * * * * *
        3. Section 250.52 is revised 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 common stock, preferred stock, bond, note or other form of 
    indebtedness, of which it is the issuer (excluding any guaranty and 
    other form of assumption of liability on the obligations of another) 
    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 common stock, preferred stock, bond, note or 
    other form of indebtedness, of which it is the issuer (excluding any 
    guaranty and other form of assumption of liability on the obligations 
    of another) 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.
        (c) Within ten days after the issue or sale of any security exempt 
    under this section, the issuer or seller shall file with the Commission 
    a Certificate of Notification on Form U-6B-2 (17 CFR 259.206) 
    containing the information prescribed by that form. However, with 
    respect to exempt financing transactions between associate companies 
    which involve the repetitive issue or sale of securities or are part of 
    an intrasystem financing program involving the issuance and sale of 
    securities not exempted by this section, the filing of information on 
    Form U-6B-2 may be done on a calendar quarterly basis.
        (d) The acquisition by a company in a registered holding company 
    system of any security issued and sold by any associate company, 
    pursuant to this section, is exempt from the requirements of section 
    9(a) of the Act (15 U.S.C. 79i(a)); provided that the exemption granted 
    by this paragraph (d) shall not apply to any transaction involving the 
    issue and sale of securities to form a new subsidiary company of a 
    registered holding company.
    
        Dated: June 20, 1995.
    
        By the Commission.
    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 95-15836 Filed 6-27-95; 8:45 am]
    BILLING CODE 8010-01-P
    
    

Document Information

Published:
06/28/1995
Department:
Securities and Exchange Commission
Entry Type:
Rule
Action:
Final rule.
Document Number:
95-15836
Dates:
June 28, 1995. These amended rules are substantive rules that grant an exemption or relieve restrictions.\1\
Pages:
33634-33639 (6 pages)
Docket Numbers:
Release No. 35-26311, File No. S7-17-92
RINs:
3235-AF49
PDF File:
95-15836.pdf
CFR: (2)
17 CFR 250.45
17 CFR 250.52