or firm that is authorized to participate in the marketing of public utility securities, including any corporation that may also be a public utility or a holding company; and any company that supplies electrical equipment, whether a manufacturer or a dealer, or a company that is a supplier by virtue of a construction, service, agency or other type of contract.63 5. SECURITIES AND EXCHANGE COMMISSION Management links that involve directors and officers of public utility holding companies and banking organizations, and horizontal and vertical interlocks that involve the officers, directors or employees of investment companies and investment advisers, are supervised by the SEC. a. Public Utility Holding Company Act The Public Utility Holding Company Act of 1935 64 includes within its jurisdiction electrical utility companies, gas utility companies, and public utility holding companies and their subsidiary companies. In its prohibitions against common managements, the act declares that no registered holding company or any subsidiary company may have as an officer or director a person who also is an executive officer, director, partner, appointee, or representative of any bank, trust company, investment banker or banking association or firm, or any executive officer, director, partner, appointee or representative of a corporation, a majority of whose voting stock is owned by any bank, trust company, investment bankers or banking association. It is apparent that this prohibition is designed to prohibit vertical interlocks that would enable bankers to control the public utilities involved. The management positions prohibited encompass both direct and indirect interlocks where such links involve public utility companies and banking organizations or corporations controlled by banking organizations. 65 Section 17 (c) authorizes the SEC to prescribe the rules and regulations that govern approval of exceptions to the prohibitions. The SEC applies, when it grants its approval to otherwise unlawful interlocks, the standard that the management tie is one "*** not adversely affecting the public interest or the interest of investors or consumers." The Public Utility Holding Company Act provides a penalty for willful violation of its provisions that forbid common managements. On conviction, a violator is subject to a fine of not more than $10,000 or imprisonment of not more than 2 years, or both.66 63 18 CFR 45.2(b). 64 49 Stat. 838, Aug. 26, 1935; 15 U.S.C. 79 (1958). 6515 U.S.C. 79q(c) (1958). The text of sec. 17(c) of the aet is as follows: "15 U.S.C., Sec. 79q. (c) Officers or representatives of banking institutions disqualified to serve as officers or directors. "After one year from August 26, 1935, no registered holding company or any subsidiary company thereof shall have, as an officer or director thereof, any executive officer, director, partner, appointee, or representative of any bank, trust company, investment banker, or banking association or firm, or any executive officer, director, partner, appointee, or representative of any corporation a majority of whose stock, having the unrestricted right to vote for the election of directors, is owned by any bank, trust company, investment banker, or banking association or firm, except in such cases as rules and regulations prescribed by the Commission may permit as not adversely affecting the public interest or the interest of investors or consumers. 60 15 U.S.C. 79z-3 (1958). In its regulations to implement the prohibitions against interlocking management positions, the SEC, to a greater extent than the other regulatory bodies, has conferred general exemptions on classes of interrelationships in lieu of an examination of the transactions on a case-by-case basis.67 Rule 70 exempts generally six classes of officers and directors of registered holding companies or their subsidiaries from the requirements of section 17 (c) of the act. These classes include officers or directors who are: (1) Persons, or representatives, who are holders of a substantial amount of the holding company's securities; (2) Trustees under a corporate trust indenture, or a single representative of such trustee, under which outstanding obligations of the holding company were issued; (3) Full time holding company employees; (4) Persons whose only financial connection is with small or commercial banking institutions; (5) Persons specifically authorized by SEC; (6) Persons whose only financial connection is with an indenture trustee holding a majority of voting stock as security for obligations in default. With respect to security holders or representatives identified in item (1) above, rule 70 exempts, as having a substantial interest, holders having (a) 10 percent or more of the outstanding voting securities of the company; or (b) 10 percent or more of any class of securities which is entitled as a class to elect one or more directors; or (c) 10 percent or more of any class of outstanding securities, if the capital amount of all outstanding securities of such class aggregates more than 10 percent of the capital amount of all outstanding securities of the company; or (d) obligations of the company that total 2 percent or more of its corporate assets, if such obligations are in default or held as security for a debt which is in default; or (e) securities in a parent of the company in the amounts or proportions specified above. This exemption is not available to any person having a financial connection with an investment banker, unless the investment banker is the beneficial owner of securities as specified above; to a representative of a trustee of a trust created primarily with reference to an interest in a holding company system, or to a representative of any financial institution.68 Exempted persons in item (4) above (financial connections with small or commercial banking institutions) include a single investment banker who has a total capital and surplus not exceeding $500,000, and who is not engaged in underwriting, marketing, or trading in, except as brokers, securities of any public utility or holding company.69 Rule 70 contains four general limitations on the six classes of exempt management interlocks it identifies. The first such limitation provides that no registered holding company shall have as many as one-half of its directors with financial connections within the 67 SEC General Rules and Regulations Under the Public Utility Holding Company Act of 1935, 17 CFR 250.70. 68 17 CFR 250.70 (a) (v). 17 CFR 250.70(a) (4). scope of the prohibitions in the statute. This limitation, however, is subject to two exceptions: (a) persons authorized by FPC orders, and (b) the proportion is increased from one-half to two-thirds in the case of a person who serves as a director (not as an officer or an employee) of one or more commercial banking institutions, each having a combined capital and surplus not in excess of $2,500,000, if such person serves only as a director, and not as an officer or employee, in the registered holding company, and such holding company is a public utility company. In no event, however, shall the number of directors with prohibited financial connections exceed two-thirds of the total.TO SEC's definition of the term "officer" is comprehensive, and includes: Chairman of the board of directors, chairman of finance committee or executive committee, president, vice president, treasurer, secretary, comptroller, and in the case of a financial institution, cashier or trust officer, and any other person who performs functions corresponding to those normally performed by the foregoing, regardless of title or designation or whether he serves without salary or compensation."1 b. Investment Company Act The Investment Company Act of 1940 72 prohibits horizontal or vertical interlocks in positions held by directors, officers, or employees of registered companies subject to the act. The provisions of the act are complex, and its prohibitions are difficult to define. The act, unlike the Public Utility Holding Company Act, and other similar enactments, does not contain a general enabling clause that permits the SEC to define classes of exempted relationships. Except for subsection 10 (f), the act itself defines and sets forth the classes of relationships that are exempted from its prohibitions. Section 10, Affiliations of Directors, Officers, and Employees, treats eight categories of common management relationships that involve registered investment companies.73 Subsection (a) provides that no registered investment company may have a board of directors in which more than 60 percent of the members are persons who are its investment advisers, or affiliated persons of its investment adviser, or its officers or employees.74 Subsection (b) provides that no registered investment company shall (1) Employ as a regular broker any of its directors, officers, or employees, or any company affiliated with any of its directors, officers, or employees, unless a majority of the board of directors of the registered company are persons who are not such brokers or affiliated persons of any such brokers; (2) Use as a principal underwriter of its securities any of its directors, officers, or employees, or any person affiliated with its directors, officers, or employees, unless a majority of the board of directors of the registered company are persons who are not such principal underwriters or affiliated persons of any such principal underwriters; (3) Have as a director, officer, or employee any investment banker or any affiliated person of an investment banker unless a majority of the board of directors shall be persons who are not investment bankers or affiliated persons of any such investment banker.75 Subsection (c) provides that no registered investment company shall have a majority of its board of directors consist of persons who are officers or directors of any one bank. If, on March 15, 1940, however, a registered investment company had a majority of its directors consisting of persons who were directors, officers, or employees of one bank, this same proportion may continue.76 In subsection (d) a registered investment company is permitted to have a board of directors, all the members of which, except one, are affiliated persons of its investment adviser, or are officers or employees of the registered company, if eight enumerated conditions, that delineate a close relationship and limit the dealings between the investment company and its investment adviser, are satisfied." Subsection (f) prohibits a registered company knowingly to purchase or otherwise acquire, during the existence of any underwriting or selling syndicate, any security which has as a principal underwriter, an officer, director, member of an advisory board, investment adviser, or employee of such registered company, or a person affiliated with any such officer, director, member of an advisory board, investment adviser, or employee, unless in acquiring such security, such registered company is itself acting as a principal underwriter for the issuer. This subsection, unlike the other subsections of section 10, authorizes the SEC to exempt, conditionally or unconditionally, any transaction or classes of transactions from its provisions. The test for such exemption is that it "** * is consistent with the protection of the in vestors." 78 The SEC, in its general rules and regulations to implement the Investment Company Act of 1940,79 deals only with subsection (f) under section 10. Three general exemptions are provided. Rule 10f-1 provides that any purchase by a registered management company, that acts pursuant to a written agreement as an underwriter of securities of an issuer that is not an investment company, is exempted from the provisions of subsection 10(f), if seven enumerated conditions are satisfied.so Rule 10f-2 provides that any purchase of securities by a registered investment company, by means of the exercise of warrants or rights to subscribe to securities, is exempt from the provision of section 10 (f) of the act. This exemption requires that the warrant or rights so exercised to have been obtained on the same basis afforded all other holders of such warrants or rights, and that the warrants or rights do not exceed 5 percent of the total amount so issued.81 75 15 U.S.C. 80a-10(b) (1958). The third rule provides an exemption for any purchase of securities by a registered investment company that is prohibited by section 10(f) of the act if the following eight conditions are satisfied: (1) The securities: (a) Are registered under the Securities Act; (b) are purchased at not more than the public offering price prior to the end of the first full business day after offering, or if offered for subscription upon exercise of rights, purchased on or before the fourth day preceding the day on which the rights' offering terminates; or (c) are offered pursuant to an underwriting agreement under which the underwriters are committed to purchase all of the registered securities except those subject to a rights' offering; (2) The principal underwriters' gross commission or profit does not exceed a range of from 1.50 to 7 percent of the public offering price, dependent upon the type of security involved; (3) The issuer of the securities shall have been in continuous operation for not less than 3 years; (4) The amount of securities of any class of such registered issue to be purchased by the registered investment company, or by two or more investment companies having the same investment adviser, shall not exceed 3 percent of the total offering in such class; (5) The consideration to be paid by the registered investment company shall not exceed 3 percent of its total assets, if less than $1 million is involved, or 1 percent of the company's total assets, if more than $1 million is involved; (6) Such registered investment company does not purchase the securities, directly or indirectly, from an officer, director, member of an advisory board, investment adviser, or employee or an affiliate thereto, of such registered investment company. Purchases from a syndicate manager are not deemed to be a purchase from a specific underwriter as long as that underwriter does not benefit directly or indirectly from such transaction; (7) The purchase of securities shall have been authorized and approved by the board of directors of the registered investment company or of an executive investment or similar committee composed of at least three members of such board; (8) A statement of the transaction showing compliance with the rule must be filed with the SEC within 30 days after consummation.82 The Investment Company Act provides a fine of not more than $10,000, or imprisonment for not more than 2 years, or both, for willful violations of its prohibitions. No person may be convicted under this provision for violation of any rule, regulation, or order on proof that he had no actual knowledge of such rule, regulation or order.83 6. CIVIL AERONAUTICS BOARD Interlocking managements involving air carriers subject to the jurisdiction of the CAB have been prohibited since the enactment of the Civil Aeronautics Act of 1938.84 When the commercial aviation supervisory and regulatory agencies were reorganized in 1958, these provisions were carried into the Federal Aviation Act, enacted August 23, 1958.85 |