STUDY OF THE SECURITIES AND EXCHANGE N THURSDAY, FEBRUARY 28, 1952 HOUSE OF REPRESENTATIVES. Washington! The subcommittee met, pursuant to adjournment, in room bo House Office Building, Hon. Louis B. Heller (chairman of .. committee) presiding. Mr. HELLER. The committee will please be in order. TESTIMONY OF MORTON E. YOHALEM, DIRECTOR, DIVISION 17 PUBLIC UTILITIES, SECURITIES AND EXCHANGE COMMIS WASHINGTON, D. C. Mr. HELLER. Mr. Yohalem, will you kindly rise and raise yo right hand? Do you solemnly swear to tell the truth, the whole tit and nothing but the truth, so help you God? Mr. YOHALEM. I do. Mr. HELLER. Will you give the reporter your full name? Mr. YOHALEM. Morton E. Yohalem. Mr. HELLER. And what is your home address? Mr. YOHALEM. 3539 Porter Street NW., Washington, D. C. Mr. HELLER. Mr. Yohalem, we have your statement of January 15, 1952. Do you have anything to add to that statement or do you desire to make any corrections? If you do, you may do so now. Mr. YOHALEM. Well, the only thing I might add might be a matter of personal biography if you are interested. Mr. HELLER. Yes; we will come to that in just a moment. Mr. YOHALEM. Otherwise I have nothing to add. Mr. HELLER. You adopt it as your statement, as your direct testimony? Mr. YOHALEM. I do, sir. (The statement above referred to is as follows:) STATEMENT OF THE DIRECTOR OF THE DIVISION OF PUBLIC UTILITIES ON THE DUTIES AND FUNCTIONS OF THAT DIVISION The Division of Public Utilities comprises the staff responsible for the administration of the Holding Company Act and for the discharge of the Commission's advisory responsibilities under chapter X of the Bankruptcy Act. The personnel of the Division consists of 63 professional employees (lawyers, financial analysts, accountants, and engineers) and 23 clerical employees. Apart from the supervisory personnel of the Division and their secretarial assistants, the staff is organized into four operating branches and a Special Studies Branch. All of the work under the Holding Company Act is centralized in Washington and it is most infrequently that the regional offices are called upon to participate in this work. The chapter X work, on the other hand, involving as it does appearance by Commission counsel in the various district courts throughout the country, is largely decentralized, the Washington staff functioning primarily in basic research, as a coordinating authority, and as liaison between the field personnel and the Commission. It may be helpful at the outset to state in general terms the manner in which matters are brought to the Commission for determination or disposed of at the staff level. Obviously, in the 16 years of administration of the Holding Company Act, and the 13 years that chapter X has been on the books, many questions have become routine with their answers to be found in a substantial body of administrative precedents. Therefore, when questions of this type are presented to the staff, generally speaking, the staff answer is accepted by the affected parties. Frequently, however, what the staff deems routine is claimed to be unique by the party presenting it for consideration, or vice versa what is submitted as routine is, because of some special circumstance, considered by the staff to present a novel question. These matters are brought to the attention of the Commission itself, either on the initiative of the Director of the Division or upon the request of the public party. Most frequently such matters are presented to the Commission in informal conferences but occasionally, as to matters arising under the Holding Company Act, they are presented to the Commission sitting in its quasi-judicial capacity as litigated matters which are conducted in accordance with the Administratve Procedure Act. It must be noted in passing that under chapter X the Commission is not vested with any authority to conduct its own proceedings; however, on occasion, interested parties have been accorded the opportunity of discussing the problems of a proceeding with the Commission in informal conference. It is the responsibility of the Director of the Division to determine which matters fall into the general pattern of Commission policy and which present such variance from established policies as to require discussion with the Commission. However, it has long been the Division's (and the Commission's) policy to be receptive to requests for conference consultation with the Commission whenever there is disagreement between the staff and outside parties over any substantial question. DISPATCH OF WORK UNDER HOLDING COMPANY ACT To each of the four operating branches in the Division are assigned holding company systems. These assignments are more or less permanent with the consequence that particular staff members become thoroughly familiar with the properties and systems with which they have to deal from day to day. From time to time the personnel of the branches is changed and systems may be transferred to other branches in order to bring to bear new ideas and the experience of different staff members. Except in the areas of rates, service to consumers, and the purchase of equipment and supplies in the ordinary course of business (over which the SEC has no jurisdiction whatsoever), the Holding Company Act provides for regulation of most transactions undertaken by registered holding companies and their subsidiaries. Practically no financing operation can be undertaken without the approval of the Commission. So also as to the acquisition or disposition of securities and utility assets. Accounting practices are subject to Commission regulation, as are proxy solicitations, reports to security holders, transactions with affiliates, service contracts, and many other matters. In the brief compass of this memorandum I shall try to show you how, typically, the problems arising under such regulation are resolved. Company X planned an expansion of its facilities which required $125,000,000 of additional capital. The company representatives, before filing any proposal with us, informed the branch handling its affairs of its program which was to issue $125,000,000 of debentures. After discussion our staff members indicated the possible imprudence of injecting so much debt into the company's capital structure, even though it was financially a strong company, without some additional supporting common stock equity. The company representatives were unwilling to modify their program except after discussion with the Director of the Division. It was suggested by the staff that, for the purpose of such discussion, the company should furnish certain additional financial data. It did so. Those data were analyzed by the staff, discussed with the Director and an alternative program was worked out involving, among other things, the sale of more than $20,000,000 of common stock. Since this was a major financing operation, before further proceeding with discussions with the top officials of the company, the Director of the Division acquainted the Commission with the nature of the problem, the company's proposal, and the staff's alternative. This was not for the purpose of securing a definitive Commission determination as to how this financing should be effected; this discussion with the Commission was rather for the purpose of assuring that the staff program was, generally speaking, in conformity with Commission policy. Thereafter, the Division Director and his staff met in conferences with the company's chief executive and his advisers and together worked out a program entirely satisfactory to the company, radically different from their initial proposal, and wholly satisfactory from point of view of the regulatory standards ordained by the Holding Company Act. Only then did the company file its application with the Commission. The proceedings which followed were uncontested and completed within the time schedule which the company's financing requirements dictated and the transactions involved were successfully consummated. Another and somewhat different instance involves a company's financing program in which it was proposed to issue a convertible preferred stock. The company's representatives were told by the staff that a security of this type did not conform to the Commission's past interpretations as to the appropriateness of an operating company's capital structure. The company officials were unwilling to accept the staff's rejection of the program and asked for leave to be heard before the Commission. Such leave was granted; the Commission supported the staff's views and thereupon an alternative program consistent with the Commission's standards was speedily worked out. Although in this example the Commission ruled with the staff, such is not always the case. Furthermore, a company dissatisfied with the informal conclusion reached in such a conference may nevertheless persist in its original course and file its proposal; in which event the matter is set down for hearing and treated as a contested case. A third example, occurring with much less frequency, concerned a proposal for financing which was not acceptable to the staff and upon which the company desired a formal determination by the Commission. The company filed its application; it was promptly set down for hearing; a record was made in which company witnesses were vigorously cross-examined by the staff; the matter was briefed and argued orally; and in due course an opinion was issued which, in part, sustained the position of the company and, in part, sustained the position taken by the staff. Controverted proceedings of this type are conducted in accordance with the Administrative Procedure Act. For the most part, however, financing programs are worked out at the staff level and only thereafter submitted to the Commission for approval. In matters of corporate finance there is a wide latitude for exercise of judgment and discretion and within that area most matters can be hammered out to conclusions which reflect adequately the aspirations of management and yet meet the requirements of sound regulation under the statute as we at the Commission understand it. Very large sums are involved; and decisions are important. While each case must be decided on its own merits, it nonetheless tends to become a precedent for other cases and must therefore be decided consistently with a pattern. Moreover, the success or failure of a particular financing may hang on ephemeral market conditions, and a high premium is put upon prompt attention and disposition by the staff and the Commission. Because of the importance of this time element, we give financing matters priority over our other work. I know of no instance where the failure of a proposed financing operation has been attributed to any undue delay on the part of the Commission or the staff. In recent years there has been an enormous expansion in the electric- and gasutility businesses accompanied by the issuance of large amounts of new securities and the problems attendant upon such financing have consumed a good deal of the time of the Division. The problems in most of these cases are resolved at levels of authority below the Director. All of them, however, receive at least his cursory review. A common problem in connection with financing concerns requests for exemption from the Commission's rules requiring securities to be sold at competitive bidding. This rule has been outstandingly successful as a device to insure the raising of capital at the minimum cost, and in freeing holding companies and 23578-52-pt. 1-49 their subsidiaries from the dominance of investment bankers. The success of the rule has depended as much upon the granting of exemption in proper cases as upon insistence upon its observance in others. Whether or not exemptions should be granted cannot be determined by rule of thumb. Rather there is required an informed judgment involving, among other things, sound appraisal of current market conditions. Decisions to grant or withhold exemptions are also invariably made at the highest level of Division authority and after consultation with the Commission itself. One of the important functions of the Division's Branch of Special Studies is to advise the Director and the Commission in this type of problem, since the data upon which a decision must rest relate not only to the particular company involved but also to factors affecting the utilities industry as a whole and general market and economic conditions. In connection with each financing, the staff will examine the terms of the issue, and, if a bond, of the indenture; they will consider the appropriateness of the issue to the capital structure and earnings of the company; the method of sale; the fees and commissions to be paid; and similar matters which the statute requires us to regulate. When novel and important questions are encountered, a staff conference may be had with the Director while the application is being processed in order to obtain his instructions. All orders of the Commission are issued only after there has been public notice given of the proposed transaction and opportunity for hearing. In some instances the Commission itself on recommendation of the staff will initially set the matter down for hearing. Generally, this occurs when it is felt the transaction requires a more intensive exploration in a public record, or where considerable public interest in the proposal indicates that some interested person is likely to request a hearing. It is the duty of the Commission to enforce the simplification and integration requirements of section 11. This is done by the institution of proceedings for a particular holding-company system directed toward the issuance of an order under that section. It is the duty of the Director to decide the order of procedure with respect to the different systems. Because of staff limitation it has never been possible to conduct proceedings for all registered systems at once. It has been necessary to pick and choose those cases where the public interest demanded the most immediate action. Study of the individual systems brings to light relationships or capital structures which are violative of the act. An order instituting proceedings is prepared by the staff and issued by the Commission. Once the enforcement program obtained its initial impetus in the early 1940's and the Commission in a series of major opinions had delineated its interpretation of section 11, the various systems, more or less willingly, came forward with plans of their own for bringing themselves into compliance with the section. These plans under section 11 (e) are set down for hearing, with notice to all security holders, and may not be approved unless they are found by the Commission "fair and equitable" to the persons affected thereby and necessary to accomplish the purposes of section 11. Frequently, when the plan is filed by a company as to which no order under section 11 (b) is extant, the Commission will institute proceedings under that section simultaneously with the issuance of its notice on the plan and join the two in a single hearing. This step is taken to assure Commission control over the course of the proceeding and more expeditious compliance. Nearly every plan under section 11 (e) requires some realinement of security holders' rights, and many of them involve a comprehensive reorganization. The staff serves an important function at the hearings. It is a wholly disinterested party, as distinguished from representatives of security holders who seek from the reorganization the maxima for their particular class. The staff must explore every aspect of the proposal, expose any defect or unfairness, and help make a record upon which the Commission can decide the case. This requires the application of expert analytical, accounting, and legal skills. Staff participation may take several forms. In some cases there may be little or no public participation at the hearings, and the staff will have the major burden of developing the case. In others, the participation by the public may be extensive and expert, with substantiol controversy between the proponents and opponents of the proposal. Then the staff's participation is generally more neutral, aimed at assuring a well-rounded record and at opposing unnecessary delay and fruitless effort. However, in these cases, the staff will generally play a crucial role by lending its good offices to reconciling differences and bringing about a compromise on the plan. In the third type of situation, the staff may oppose the plan in part or in its entirety as contrary to the standards of the act. As an adverse party in litigation, it is subject to the restrictions of the Administrative Procedure Act, and will appear before the Commission only through brief and at oral argument on the merits of the case. During the course of the proceeding, it will, of course, have access to the Commission on administrative questions. In uncontroverted cases, the Division will usually prepare draft findings for the Commission. In controverted cases, where the staff appears as an adverse party, findings are prepared by the Division of Opinion Writing. The statute provides for enforcement of plans after Commission approval in the Federal district court or for appeal from the Commission's order to the court of appeals. Enforcement proceedings in the district court are handled by the Division's chief counsel, who, with staff attorneys, prepares all necessary court papers and pleadings and presents oral argument in the court. On appeals, whether directly from Commission orders or from the district court, the Office of the General Counsel assumes responsibility for the case, with assistance from the Division's chief counsel and other attorneys. The Commission has jurisdiction to award from the estate fees and allowances to counsel and experts in connection with section 11 (e) plan reorganizations. A separate fee hearing is convened after completion of the plan proceedings and the staff recommends amounts for compensation. When controversy develops, the staff will prepare proposed findings. The Commission is empowered to exempt holding companies meeting certain standards from all or specific provisions of the act. The Branch of Special Studies is responsible for the surveillance of exempt companies, and any transgression of the conditions of exemption or any fundamental or significant change in operations is brought to the attention of the Director for remedial action. The statute also contains provisions covering the formation of new holding companies. The work of the Division in this connection is also handled by the Branch of Special Studies. Registered companies and service companies over which the Commission has jurisdiction must file periodic reports with the Commission. These reports are reviewed for completeness and accuracy, and deficiencies are brought to the attention of the company for correction. In addition, studies into original cost of properties are conducted, and mutual service companies are regulated. CHAPTER X Copies of all pleadings in which the Commission is participating under chapter X are filed in the Washington office in order that the Commission may have a complete record upon which to advise the court as required by the statute. Chapter X cases are assigned to the various branches, who maintain a continuing familiarity with the progress of the case but take no active part until a report or study has to be prepared or some development occurs which requires their assistance. In this manner the chapter X work is handled as part of the Division's regular workload with no measurable increase in overhead. The field offices report to the special assistant for chapter X in the Division who, with the Director, guides and directs the field offices in their participation before the court. Primarily, the chapter X work is done in the field; appearances in court, participation in conferences, the initial drafting of briefs, reports and other papers, conduct of investigations, etc., are handled in the field, although, on occasion, this may be done from Washington when this would be more efficient or where the central office is handling the case directly. Before any position is taken before the chapter X court by a regional office, the advice of the central office is obtained, and when the matter is of significance or concerns a novel issue it is presented to the Commission for approval. The matter is presented to the Commission either by written memorandum or orally, depending upon the complexity of the case and the time factor. On occasion, when the case is complex and the ramifications require full discussion by the Commission, a field staff member may attend the conference before the Commission. Although the Commission has no standing to appeal from a decision of the chapter X court, it participates in appeals taken by others. Since it is at the appellate level that decisions of far-reaching importance to the administration of the bankruptcy laws are customarily made, this activity of the Commission is of extreme importance; and the Commission frequently files an amicus brief on matters of general scope in cases where it has not intervened, taking no |