North American Co. v. SECURITIES AND EXCHANGE COM'N, 105.

• Decision Date: 01 March 1943
• Docket Number: No. 105.,105.
• Citation: 133 F.2d 148
• Parties: NORTH AMERICAN CO. v. SECURITIES AND EXCHANGE COMMISSION.
• Court: U.S. Court of Appeals — Second Circuit

133 F.2d 148 (1943)

NORTH AMERICAN CO. v. SECURITIES AND EXCHANGE COMMISSION.

No. 105.

Circuit Court of Appeals, Second Circuit.

January 12, 1943.

Writ of Certiorari Granted March 1, 1943.

COPYRIGHT MATERIAL OMITTED

Sullivan & Cromwell, of New York City, (Charles E. Hughes, Jr., of New York City, of counsel), for petitioner.

John F. Davis, Sol., Milton V. Freeman, Asst. Sol., Roger S. Foster, Counsel, Public Utilities Division, David K. Kadane, Maurice C. Kaplan, and Jerome S. Katzin, all of Philadelphia, Pa., for respondent.

Before SWAN, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

Writ of Certiorari Granted March 1, 1943. See 63 S.Ct. 764, 87 L.Ed. ___.

SWAN, Circuit Judge.

This case is before us on petitions of the North American Company, filed pursuant to section 24(a) of the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79x(a), to review two orders made by the Securities and Exchange Commission in a proceeding initiated by it under section 11 (b) (1) of the Act, 15 U.S.C.A. § 79k(b) (1). The orders were entered on April 14, 1942 and June 25, 1942, respectively. The opinions of the Commission in support of them will be reported in the North American Company, 11 S.E.C. ___ and ___.¹ The April order directed North American to divest itself of all its securities, with minor exceptions, other than those of Union Electric Company of Missouri and its subsidiaries (hereafter referred to as the St. Louis system). The June order denied North American's motion for leave to present further argument that the Commission lacks power to designate the particular system to be retained as its "single integrated public utility system." North American's petitions to this court raise questions as to the construction and application of section 11(b) (1) and challenge its constitutional validity.

The North American Company was organized in 1890 under the laws of New Jersey. Its principal office is in the City of New York, N. Y. Its business consists in acquiring and holding for investment stocks and other securities, principally in the electric utility field. It is the top holding company in a system containing 80 companies and operating in 17 states and the District of Columbia. At no time has it engaged in the business of managing the operations of its public utility operating subsidiaries, or selling them supplies, engineering services or the like. It has, however, furnished financial advice and assistance and sponsored the interchange of operating information among the subsidiaries. On February 25, 1937 North American registered under the Act,² and thus became "a registered holding company" within the meaning of section 11(b) (1). This section makes it the duty of the Commission, "as soon as practicable after January 1, 1938," to require each registered holding company to take such action as the Commission may find necessary to limit the operations of the holding company system to "a single integrated public-utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations" thereof. A proviso permits a registered holding company "to continue to control one or more additional integrated public-utility systems" if they satisfy the requirements of clauses (A) (B) and (C) of the section. The orders complained of limit North American's operations to the St. Louis system. Such other facts as are required to be stated will appear in the course of our discussion.

The first matter for consideration is the petitioner's contention that it was premature for the Commission to proceed with forced divestment under section 11(b) (1) before it had made the studies and published its recommendations as required by section 30, 15 U.S.C.A. § 79z-4. The issue was presented by a motion, denied by the Commission, to hold the proceeding in abeyance pending publication of such recommendations. It is argued that Congress expected many holding companies, if given time and guidance, voluntarily to rearrange their affairs; the operation of section 11(b) (1) was postponed to give the time, and the Commission was instructed to supply the guidance by making public its recommendations of administrative standards in respect to the matters referred to in section 30; hence, the order of April 1942 was premature as no such guidance had been supplied. Whatever may have been the expectation of Congress as to voluntary readjustments, we can find nothing in the statutory language justifying a holding that the recommendations which the Commission is directed to "make public from time to time," are a condition precedent to invoking the procedure of section 11(b) (1) to compel integration. If completion of ex parte studies under section 30 were a prerequisite to action under section 11(b), it should equally be so to action under section 11(e) or under section 10(c) (1), 15 U.S.C.A. § 79j(c) (1). Since such studies and recommendations are apparently to be made "from time to time" throughout the life of the Commission, to hold that enforcement of other provisions of the statute are dependent on completion of the studies would defer their enforcement indefinitely. We cannot impute such an intention to Congress. If it be argued that enforcement as to a particular holding company should be deferred until a study has been made and recommendations published as to it, a sufficient answer is that the company must be accorded a hearing before integration can be ordered. We are satisfied that section 30 should be construed merely as an administrative direction to the Commission, not as a condition precedent to conducting a proceeding under section 11(b) (1). Compare United States v. Morgan, 222 U.S. 274, 32 S.Ct. 81, 56 L.Ed. 198. For a discussion of the specific point see Commonwealth & Southern Corporation, 11 S.E.C. ___.³

We now turn to the petitioner's contentions relating to the interpretation and application of section 11(b) (1). The first is as to selection of a single integrated public utility system to be retained (which may conveniently be called the "principal" system). The selection of a principal system must naturally precede any final determination of what "other businesses" are "reasonably incidental or economically necessary or appropriate to the operations of such" principal system, as well as what "additional integrated public-utility systems" the holding company is to be permitted "to continue to control." Where, as in this case, there are found to be several integrated public utility systems,⁴ any one of which might reasonably be chosen as the principal system, is the choice to be made by the holding company or by the Commission? We may assume, without so deciding, that the privilege of selecting its principal system should, during preliminary stages of the section 11(b) (1) proceeding, be accorded the holding company. This was done and only after North American had refused to express a preference between the several integrated public utility systems, was the St. Louis system selected by the Commission as the principal system for retention. No contention is made that the Commission made an unreasonable selection or that the selection of a different system would be more beneficial to North American. Its argument is merely that it cannot now tell which two of the three systems (St. Louis, Cleveland and Wisconsin) will be most marketable; that section 11(c) gives it at least one year for compliance with the divestment order; and therefore it may select its principal system at any time within the period allowed for compliance. We do not think the statute contemplates such deferment of selection. It would necessarily result in delays. The Commission's duty is to act under section 11(b) "as soon as practicable," and due diligence in complying with the order is prescribed by section 11(c). Nor do we see that deferment in selecting the principal system is necessary to adequate protection of a holding company against circumstances which may arise during the period allowed for compliance with the order. If changes occur in "the conditions upon which the order was predicated," the Commission is authorized by subsection (b) to revoke or modify any order previously made thereunder. Under the circumstances disclosed by this record we see no error in the Commission's selection of the St. Louis system as the principal system for retention.

It is next contended that the Commission erred in limiting North American to the retention of a single integrated system; that under the (A) (B) (C) standards of section 11(b) (1), properly interpreted and applied, it is entitled to retain as additional or secondary systems the groups of subsidiaries which constitute the Cleveland and the Wisconsin systems. The (A) standard requires a finding that the additional system cannot be operated independently "without the loss of substantial economies which can be secured by the retention of control" by the holding company. It has been the practice of North American to furnish financial advice and, on occasions, direct financial assistance to its subsidiaries, and to sponsor the interchange of statistics and operating information among them. Such practices, it is urged, have been of great value to the Cleveland and the Wisconsin systems and a discontinuance of their relations with North American will cause them the loss of "substantial economies." After considering these arguments and the evidence presented in their support, the Commission refused to find that the additional systems could not be operated independently without the loss of substantial economies. Whether economy is achieved by centralized control is always a doubtful question and one peculiarly fitted for decision by an administrative agency staffed by experts. On such an issue a court cannot review or reweigh the evidence. See Morgan Stanley & Co. v. Securities Exchange Commission, 2 Cir., 126 F.2d 325; section 24(a) of the Act, 15...