The Commission tends to permit the holding of a stock interest in a carrier to be a justification for approval of an interlocking director. On elimination of the stock interest through sale or other transfer, where the railroads are in active competition, the Commission has denied the application to continue the dual positions.94

With respect to dual service in companies that are parts of separateand independent systems, the Commission has discouraged interlocking relationships. In 1931, with respect to an application by Mr. Rand for permission to be a director of both the St. Louis-San Francisco Railway Co. (part of the Rock Island System) and the Cleveland, Cincinnati, Chicago & St. Louis Railway Co. (part of the New York Central System), the Commission noted that even though the two railroads served different territories:

Actual independence of the system concerned will not be subserved by permitting the same persons to serve upon the boards of directors of two major carriers, each of which is an important member of a different independent system.

95

The burden of proof to be borne by the applicant is set forth in the Astor case. The Commission's statement on this aspect of the case

was:

It is not enough to say that we can see no harm in what is proposed. It is essential that we be able to say beyond doubt that neither public nor private interests will suffer."

In considering applications that interlock systems, the presence or absence of competition was not considered as of controlling importance. In 1941, in the Coverdale case, however, the Commission majority gave effect to factors beyond those limited to the question of the carriers' or systems' independence. Competition was given as an additional factor to be considered. In this respect the Commission stated:

* Moreover, the question of competition between independent carriers and systems assumes greater importance in the absence of the plan of consolidation, since in view of the provisions of that plan we were warranted, in considering applications under section 20a (12) of the act, in disregarding the presence or absence of competition between carriers assigned to the same system."

Other factors the Commission considered in this application involved the residence of the applicant and the location of his financial interests. In denying the application, the Commission noted that the applicant's residence and principal business interests were in New York. and the railroads involved were in the South and Midwest. The Commission in this connection stated:

We have observed with satisfaction that some of the important railways in the central and far West are replacing former officers and directors who lived and were occupied with business interests in places remote from those in which the railways operate, with men whose interests are mainly centered in the same territories as those served by the railways concerned. The public interest, in our opinion, is likely to be subserved by that policy.

The Coverdale proceeding was reopened and the Commission had occasion to examine his connections with a steamship line, an airline,

In re Interlocking Directors, 145 ICC 23 (1928). See also Application of Leonor F. Loree, 145 ICC 521 (1928).

95 In re Rand, 175 ICC 587 (1931). See also In re Astor, Interlocking Director Application, 193 ICC 528 (1933).

9 Id., 193 ICC 528, 529 (1933).

In re Coverdale Interlocking Directorate Application, 244 ICC 567, 569 (1941). 98 Id., at 571.

and other companies, and to consider the effect of potential competition on the railroads involved. The Commission denied the application and stated:

Generally speaking, the holding of positions of officer or director with numerous corporations is not compatible with the best interests of the corporations served. This is especially true where, because of the nature of the business of such corporations, there is a possibility that the interests may conflict. Here the applicant not only serves a large number of corporations as director or as both officer and director, which in itself is a thing not conducive to the best interests of the corporations served, but also serves as officer or director of carriers engaged in modes of transportation wherein the general interests are often sharply in conflict with the general interests of transportation by rail."

The vast majority of applications submitted under section 20a (12) are approved by the Commission after a finding that neither public nor private interests are adversely affected by the interlocking relationship. Table No. 1 was prepared by the ICC at the request of the Antitrust Subcommittee. This table shows that during the period 1921 through November 1964, 10,937 applications for approval of interlocking relationships were submitted. The Commission approved 10,692, denied 46, and 190 were withdrawn.

TABLE 1.—Interlocking directorate applications under sec. 20a (12) of the Interstate Commerce Act

1 Two authorizations heretofore granted were revoked.

In its 77th annual report to Congress, dated December 31, 1963, the Commission requested two amendments to section 20a (12). The first amendment would eliminate the necessity for prior approval by the Commission for a person to hold the position of officer or director of more than one carrier, when such carriers are in a single integrated system that is operated under common control. In its justification for the request for this amendment, the Commission noted that when railroads are under lawful common control they form essentially a single system. In this circumstance, the Commission believes, the

In re Coverdale, 252 ICC 672, 677 (1942).

holding of intrasystem interlocking officer positions is a natural aid to coordination of operations. For a long time, the Commission stated, it has approved such applications as a matter of course; elimination of the necessity to file applications, additionally, would save time and expense. With respect to the volume of recent applications involved in this aspect of its business, the Commission stated:

A total of 642 interlocking directorship applications were filed during the period covered by the Commission's 74th, 75th, and 76th annual reports to Congress (1960 through 1962). Since less than 2 percent of these applications involved positions in unaffiliated carriers, the time and money consumed in filing and processing approximately 98 percent of these applications could have been saved if the section were revised as recommended. Moreover, a considerable reduction in recordkeeping expenses would have been realized.100

The second amendment requested by the ICC would expand the definition of "any person" to include the holding of positions by different members, officers, employees and directors of the same board, copartnership, corporation, joint stock association, or their representation through agents or nominees. In its justification the Commission noted that this strengthening of the act was needed to reach indirect interlocks through holding companies and brokerage firms not subject to the act. In this connection the Commission stated:

There is, in our opinion, little difference between (a) two directors or partners in a noncarrier separately holding positions with two different carriers, and (b) an individual holding such positions. The possibilities of achieving common control of the carriers and the undesirable practices which section 20a (12) was designed to prevent, are practically the same in both situations. The use of different officers of noncarrier holding companies and brokerage firms to control the affairs of two or more unaffiliated carriers can thus circumvent the present section and defeat its purpose.'

101

Neither of these requests in the ICC's 77th Annual Report were enacted during the 88th Congress.

c. Section 5(14)-Panama Canal Act amendment

In interpreting the provisions of section 5(14), the ICC has delineated the extent of the competition that is necessary to bring the statute into operation when the requisite control of the water carrier is present. In the Lehigh Valley case, the Commission found that the requisite competition was present between a railroad carrier and its lake freighter when the railroad participated in an association that established through routes and joint rates between the east coast and Chicago and other western points. The ICC found the control of the water carriers by the railroad was prohibited even though the company's railroad lines ended at Buffalo and its lake freighters interchanged both eastbound and westbound freight at Buffalo. The rail lines and the water lines did not parallel each other.102

In the Bison Steamship case, in 1960, the ICC refused to suspend tariffs that were designed to meet and beat the operating costs of a lake vessel that was owned by one of the railroad carriers. The lake vessel contended that when a violation of the Panama Canal Act is present, a rate that is founded on and justified by the illegal competitive relationship becomes presumptively illegal. The ICC took the position,

100 Material submitted by Senator Magnuson in connection with the introduction of S. 2558 at the request of the ICC, 110 Congressional Record 3592, Feb. 26, 1964. 101 Id., at 3592-3.

103 Lehigh Railroad Co. v. U.S., 234 F. 682 (1916), aff., 243 U.S. 412 、1917).

which was supported by the court, that the matter of whether suspension would be warranted was within the discretion of the Commission and that in appropriate circumstances the Commission could approve the rate notwithstanding the existence of a relationship prohibited by the Panama Canal Act. The district court, in its review, stated:

*** The question before the Commission in the suspension proceeding was whether the published rate should be suspended as probably unreasonable while a full hearing as to its legality was undertaken. In concluding that it should not suspend, we must assume the Commission relied upon its particular expertise in the area of national transportation."

103

In determining the extent of the interest in the water carrier that is required to bring the provisions of section 5(14) into operation, the Commission has ruled that possession of sufficient stock to put one director on the board of a competing water carrier is adequate. In the opinion of the ICC, such a relationship could have the following effect:

Through such representation on the board the railroad would have managerial influence of the same "genus" as if it had a majority. True, the railroad would not have control, legal, or actual, over the competing water carrier, but its stock and one director representation would, nevertheless, be an interest plainly condemned by section 5(14) of the Interstate Commerce Act."

2. FEDERAL RESERVE BOARD

104

The significant cases to appear before the Board of Governors of the Federal Reserve System in connection with section 43 of the Banking Act of 1933, as amended,105 have involved the definition of the words "primarily engaged" in the statute. Section 32 forbids any officer, director or employee of any organization primarily engaged in securities underwriting activities from serving as an officer, director or employee of any Federal Reserve System member bank.

In the Agnew case, certain directors of Paterson National Bank were also employees of Eastman, Dillon & Co. Eastman, Dillon & Co., which for a number of years had done no business with the bank, was engaged in the securities business: 26 percent of its gross income was from the underwriting field, and its gross income from its brokerage business amounted to 42 percent of its gross income from all sources. The directors contended that the phrase "primarily engaged" limited section 32's application to cases where the underwriting business of the securities firm was first in volume in comparison with the rest of the firm's other business or businesses. The FRB, in its construction of the statute, concluded that the objectives of the law would be frustrated by this definition. The Board considered the word "primarily engaged" to require only that underwriting be an important part, but not necessarily the principal part, of the securities firm's business. As a result of its determination, the Board ordered the directors to be removed from the board of Paterson National Bank.

The directors' petition for an injunction to prevent the Board from carrying out its order was dismissed. The circuit court of appeals reversed on the ground that Congress, in enacting the statute, only intended to prohibit interrelationships between banks and securities

103 Bison Steamship Co. v. U.S., 182 F. Supp. 63, 68 (1960).

104 In re Nicholson Universal Steamship Company Ownership, 248 10€ 43, 64 (1941). 106 12 U.S.C. 78 (1958).

firms whose major business was underwriting. In this connection the court stated:

The evil at which this section of the statute was aimed was the possible selling of securities to the bank by its directors. Congress may well have considered that such practice is much more likely to occur where underwriting is the principal or chief business of a concern, than where underwriting is a lesser or secondary interest.100

On further appeal, the Supreme Court overruled this interpretation and sustained FRB's original view. The Supreme Court believed that Congress was interested in the dissolution of any relationship between a security concern and a member bank if underwriting was an important part of the security concern's business. The Supreme Court stated:

Section 32 is directed to the probability or likelihood, based on the experience of the 1920's, that a bank director interested in the underwriting business may use his influence in the bank to involve it or its customers in securities which his underwriting house has in its portfolio or has committed itself to take. That likelihood or probability does not depend on whether the firm's underwriting business exceeds 50 percent of its total business.107

In May 1964, the FRB announced an administrative interpretation of section 32 that also involves application of the words "primarily engaged." The Board was asked to determine whether the statute prohibited service as a director of a member bank where the individual involved also was a partner in a brokerage firm, which itself did not engage directly in underwriting activities, but which had a wholly owned corporate affiliate engaged in securities underwriting of the kind described in section 32. With the approval of the exchange, the director of the member bank, as a partner in the brokerage firm, had not taken ownership of any of the stock of the corporate affiliate. Rule 321.15 of the New York Stock Exchange, the FRB concluded, requires the partnership and its underwriting arm, the corporate affiliate, to be regarded as a single entity or enterprise for purposes of section 32. Although the "underwriting arm" had a gross income from the kind of business described in section 32, that was less than 7.9 percent of the income of the partnership, considered as a single entity the FRB concluded that the partnership and the corporation were "primarily engaged" in the securities underwriting business within the prohibitions of section 32. In accordance with this ruling, the partnership, members, and the director concerned, were forbidden to serve as officers, directors, or employees of any member bank.108

In response to the subcommittee's request for statistical data, the FRB reported that it does not maintain statistics with respect to the number of interlocking positions it has excepted from the requirements of section 32. Regulation R 109 of the Board, in footnote No. 2, states that the FRB is not authorized to issue individual permits under section 32, and that it can only authorize exceptions by general regulations. As a result of this policy there is no information available at the FRB to determine the frequency of exempted interlocking relationships.

108 Agnew, et al. v. Board of Governors of Federal Reserve System, 153 F. 2d 785, 794 (1945). 107 329 T.S. 441, 447 (1947). 108 50 FRB 563 (May 1964). 100 12 CFR 218.