about 100 percent over the applications received in the 6 months ended December 31, 1936.

Section 11 (b) of the act states that

"It shall be the duty of the Commission, as soon as practicable after January 1, 1938:

"(1) To require by order, after notice and opportunity for hearing, that each registered holding company, and each subsidiary company thereof, shall take such action as the Commission shall find necessary to limit the operations of the holdingcompany system of which such company is a part to a single integrated publicutility system, and

This involves a very large undertaking, and while a small portion of the staff is presently engaged in studies preparatory to the operation of this section, a larger staff and broader studies will be required before the Commission is in a position to perform its duties under this section.

Applications with reference to reorganization plans under section 77-B of the National Bankruptcy Act for registered holding companies have been filed recently with the Commission. Such reorganization plans involve a detailed study of the plan of reorganization and certain cases will take the time of three or four men for a 3 to 6 months' period before the case is even ready for Commission action. Present indications definitely point to the fact that additional reorganization plans for large registered holding companies will be filed with the Commission in the near future.

In addition to the above-mentioned 77-B reorganization plans, the Commission will receive an increasing number of plans under section 11 (e) for voluntary simplifications and reorganizations of registered holding companies, one such plan for the American Water Works & Electric Co. has already been set down for hearing, and it is known that others are in the offing. These plans again are complex and will require the careful study of a number or men for severnl months.

Although no full presentation of the functions included in this project is to be covered in these justifications, it is nevertheless necessary to refer to and explain briefly some of the more important tasks and to present information regarding the volume, complexity, and variety thereof.

(a) Registrations.-The Public Utility Holding Company Act of 1935 provides that, unless a gas or electric holding company is registered with the Commission, it is unlawful for it to use the mails or any means or instrumentality of interstate commerce for specific purposes. Registration is accomplished by, first, filing a notification of registration on Form U5A and 90 days thereafter filing a complete registration statement on Form U5B.

The registration statement calls for the submission of a wealth of financial and other information, which has not been available in the past and which will now provide protection, through disclosure, to investors, consumers, and the general public. It is believed that many of the abuses which sprung from the inaccessibility of information about the holding company, its interests and activities, will be eliminated through the publicity afforded from registration. It is also believed that such registration will develop into a real deterrent of future chicanery and abuse.

As of June 30, 1936, there were 65 holding companies registered under the act. During the year ended June 30, 1937, 21 additional companies registered, bringing the total number of registered holding companies to 86.

These registration statements must be examined for compliance with the act and rules and regulations, deficiencies corrected, amendments received and examined, correspondence conducted, and hearings and conferences held.

(b) Exemptions.-Applications for exemption under the Public Utility Holding Company Act are handled and examined jointly by the Public Utilities Division and the Legal Division. This work is described under "Project No. 9."

(c) Issuance of securities.—One of the important provisions of the act relates to control over the issuance of securities. During the fiscal year just ended, the Commission received 95 applications and declarations relating to the issuance of securities by registered holding companies and their subsidiaries; 24 applications and declarations had been received previously, making a total of 119 received since the act became effective. Of these, 87 have been approved, 11 withdrawn, and the balance of 21 were pending on June 30, 1937.

The Commission must pass upon the merits of these applications. The Public Utility Holding Company Act of 1935 provides that it shall be unlawful for any registered holding company or subsidiary thereof, by use of the mails or any means or instrumentality of interstate commerce, or otherwise, directly or indirectly, to issue or sell any security of such company, or to exercise any privilege or right to alter the priority, preferences, voting power, or other rights of the

holders of an outstanding security of such company, unless a declaration with respect to the security has been filed with the Commission and has become effective. The act also provides that the Commission shall not permit a declaration to become effective unless the security meets certain specified standards and the terms and conditions of the issue or sale are not detrimental to the public interest or the interests of investors or consumers.

Accordingly, this function is an important and involved activity which requires extremely experienced and technical personnel to examine and pass on the forms submitted, conduct conferences and hearings, assemble facts, and draft correspondence, reports, decisions, and orders.

(d) Acquisition of securities, utility assets, and other interests.-The act requires that acquisitions by registered holding companies and their subsidiaries, of securities, utility assets, or any other interest in any other business be passed on by the Commission. In acting upon these applications, the Commission must ascertain whether the acquisition will serve the public interest by promoting economical and efficient development of an integrated public utility system. The applications must be denied if they tend toward interlocking or concentrated control of public utility companies in a manner detrimental to the public interest, or the interest of investors or consumers; if the consideration to be paid is not reasonable; if the acquisition will unduly complicate the capital structure of the system; or if it will otherwise be detrimental to the public interest of investors or consumers, or the proper functioning of the system.

Since the effective date of the act, the Commission has received 76 such applications requesting approval of the acquisition of securities and assets. Fifty-six of these were received during the fiscal year ended June 30, 1937. Of the total applications received, 53 were approved, 8 were withdrawn, or dismissed, and the balance of 15 were pending on June 30, 1937.

A large number of man-hours must be spent on each application by experienced attorneys, accountants, and public utility financial analysts.

(e) Commission reports on reorganization plans.-Section 11 (g) of the act, among other things provides that the Commission shall prepare a report on each plan of reorganization, or other plan of financial readjustment of a holding company or subsidiary thereof, and that a copy of such report shall precede or accompany each solicitation of a proxy in connection therewith. In order to illustrate the nature of these reports, the action taken in a particular case is cited. On March 1, 1937, a registered holding company filed an application for a report by this Commission on its proposed plan of recapitalization. The objective of the proposed plan was to place the company in a position to refinance its outstanding funded debt at lower interest rates and to provide funds for debt maturities and future additions to plant and property.

Since the plan was proposed by the management which was identified in interest with the holder of the old common stock, the Commission in its report was primarily concerned with the fairness of the plan as it affected the preferred stockholders.

After directing attention to the purposes of the recapitalization, as set forth above, the Commission briefly described the mechanics of the plan. Thereafter, the report defined the position of the preferred stockholder, directing his attention to sacrifices of reduced liquidating value and reduced annual dividends in the new preferred stock to which he would be entitled and to the compensating advantages in the form of dividend arrears certificates and new common stock.

The fact that the preferred stockholders as a class were to receive over 60 percent of the new common stock and, therefore, a proportionate participation in future equity earnings was stressed as the most vital consideration and the significance of this was explained, using the earnings estimates of the sponsors of the plan with necessary qualifications.

The report thus provided investors with pertinent comments of an independent and informed body which had critically examined the plan from every angle. Unquestionably, the assistance thus provided made possible a more intelligent appraisal of the merits of the plan and created a better understanding by investors of the real problems confronting the company.

A similar report on a plan of recapitalization was also made by the Commission in one other case involving a company which had applied for exemption as a holding company from the provisions of the act. In addition there must be reports on reorganization plans of such companies in bankruptcy. During the fiscal years 1938 and 1939, it is estimated that the number of reorganization reports to be prepared will increase to around 15 or 20 a year. Several very sizeable companies have already indicated their intention of voluntarily complying with

the provisions of section 11 (g) of the act. Accordingly, it will be necessary for the Commission to assign additional personnel to this work during the next few years. The personnel required will consist of expert utility analysis, experienced accountants, and corporation lawyers. These employees will be called upon to make complete analyses of underlying subsidiary companies; to make analyses of accounting and depreciation policies; to determine basic property values; and to make the necessary analyses of securities; each of which are very sizeable, complex, and technical tasks.

(f) Simplification of corporate structures of holding-company systems.-Under sections 11 (a) and 11 (b) of the act the Commission is required, as soon as practicable after January 1, 1938, to examine the corporate structures of every registered holding company and subsidiary thereof to determine the extent to which the corporate structures of such holding company-systems may be simplified.

A number of holding companies already have filed applications which have been acted upon by the Commission, involving the simplification of their corporate structure. Generally, the nature of the simplification involves (1) transformation of holding companies into operating companies by acquisition of the utility assets of subsidiaries; (2) exchange of control of properties for the purpose of creating integrated public-utility systems; and (3) simplification of corporate structures of holding-company systems by merger of subsidiaries operating in the same area.

Under the act the Commission will soon be required to take the necessary action to bring about the simplification of the corporate structure of registered holding companies that have not voluntarily submitted applications. This will require the conduct of field investigations, the holding of conferences, and the scheduling of hearings for the purpose of developing detailed information regarding the public-utility systems, with a view to determining how the integration and simplification which the statute calls for might best be achieved. The studies will include the history of the companies; maps and data showing the extent of operation and service rendered; full description of the property owned; estimates of net value; information relative to capitalization, franchises, State regulations and laws; data on operation, management, and control of the company, service contracts, earnings, expenses, and related matters. Shortly after January 1, 1938, this function will be one of the most difficult and costly to administer. It will no doubt be a major function under the Public Utility Holding Company Act.

It is only with extreme effort and some overtime that the staff has been able to keep the work reasonably current and dispose of the variety of applications, declarations, annual reports, registrations, reorganization plans, etc., received pursuant to the act. With the increase in work as outlined above, it will be impossible to keep current. In order to relieve this situation to some extent, in the fiscal year 1939, it is proposed to transfer some of the employees now assigned to the investment trust study to this project. The amount of the 1938 allotment for this project is $345,940, and for the fiscal year 1939 the sum of $399,120 is requested. This amount includes the cost of the salaries of the employees to be transferred to this work from the investment trust study.

If and when a favorable determination is reached on the constitutionality of the act, it will be necessary for the Commission to secure supplemental funds at once. 6. Statistical, accounting, and technical activities.-The principal duties under this project briefly described are (1) the collection of statistical information bearing upon current developments in the securities market; the maintenance of statistical records and preparation of reports from material collected; (2) the conduct of studies, investigations, and researches involving accounting theory, policy, and procedure; (3) the drafting and interpretation of accounting rules, regulations, opinions, and related matters; (4) the conduct of special studies of a statistical, accounting, and technical nature, for use by the Commission in the establishment of general policies; and (5) rendering advice to the Commission in technical, accounting, and related matters.

Following the adoption on May 12, 1936, of a uniform system of accounts for mutual service companies and subsidiary service companies, the Commission, on August 8, 1936, adopted a uniform system of accounts for public-utility holding companies. Thus, financial data for such companies were compiled for the first time on a uniform basis. These data have been of material assistance to investors, to this Commission, and to State regulatory commissions. During the fiscal years 1938 and 1939, the Commission will be obliged to supervise the maintenance of these accounts by registered companies to insure compliance with the adopted

uniform systems. In addition, numerous inquiries of unique and complex character regarding the interpretation of classifications and opinions on accounting policies, procedures, and precedents are being received. Considerable time must be spent on drafting replies to these inquiries. This is new work for which personnel has not heretofore been provided. Important accounting research work has been delayed by reason of assignment of personnel to this work. Additional personnel will be needed in the near future for working out accounting principles and rules governing accounting practices.

The project covers activities under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Public Utility Holding Company Act of 1935. It is estimated that the same amount allocated for this purpose in the fiscal year 1938, viz, $173,420, will be required in the fiscal year 1939, and accordingly, no detailed statements in justification are submitted.

7. Executive staff and general administrative activities.-There are grouped under this heading (a) the commissioners, their staff and technical assistants; (b) the secretary of the Commission and his immediate office force; and (c) the employees assigned to the Administrative division.

In addition to the duties performed by the commissioners, their staff, and technical assistants, the work under this activity includes (1) action on, signing, and service of, all commission orders, actions, and certifications; (2) preparation and defense of the budget estimates before the Bureau of the Budget and the Appropriations Committees of Congress; (3) preparation of the Commission's annual report to Congress; (4) action on all allotments and expenditures of the Commission's appropriations; (5) assisting in the coordination of the many activities of the Commission; (6) action on the preparation, maintenance, and indexing of the official minutes of the Commission, and the drafting of memoranda to the division heads and regional offices, indicating the action taken on matters presented to the Commission; (7) the handling of all personnel matters for the Commission; (8) all service activities such as the establishment of field offices, the preparation of leases, the preparation of contracts for miscellaneous services, all duplicating activities, the purchase, storage, and issuance of supplies and equipment, the maintenance and distribution of forms, rules, regulations, instructions, opinions, press releases, etc., the compilation of statistical information by means of card punching, sorting, and tabulating machines, and the editorial and printing work; (9) the preparation and maintenance of the dockets and records on all registration statements, applications, declarations, etc., filed with the Commission; (10) the maintenance of the central files of the Commission; (11) the maintenance of the public reference room and the dissemination of information with respect to all public documents filed with the Commission; (12) the maintenance of the library, the central mail room, and the stenographic pool for servicing all divisions of the Commission; (13) the maintenance of the Commission's appropriation accounting records and the auditing of vouchers and pay rolls covering expenditures; (14) the conduct of general correspondence not relating to technical subjects or matters; and (15) the examination of and action on all applications for admission to practice before the Commission as attorney or agent. The sum of $648,160 has been allotted to this project for the fiscal year 1938, and the same amount is requested for the fiscal year 1939.

8. Drafting of rules, regulations, and forms.-This project includes the drafting of forms and rules and regulations for promulgation by the Commission pursuant to the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forms are for use in connection with the regulation of stock exchanges of the country, the flotation of new securities, and the registration of securities listed on exchanges by a great variety of securities issuers. In order to eliminate undue burdens on the varied types of businesses, companies, and corporations that are required to make use of these forms to submit information to the Commission as required by law, it is necessary to develop considerable information before revising existing forms or drafting new ones.

To obtain this information, it is necessary that the employees assigned to this project (1) conduct researches of an accounting, legal, and economic nature for the purpose of developing facts, policies, and customs regarding specific industries that might be affected by the promulgation or revision of forms, rules, and regulations; (2) conduct conferences and interviews with representatives of accounting and legal societies and associations, stock-exchange officials, and others, for the purpose of securing suggestions concerning proposed forms and regulations, and in order to ascertain the reaction of these representatives to the proposed forms and regulations, particularly with respect to the burdens that may be imposed upon industries as a result of their promulgation; and (3) conduct studies in connection

with the forms, rules, and regulations now in existence to determine whether they should be amended, revised, or modified.

The work under this project also includes the preparation of legal opinions and interpretations concerning these forms, regulations, and rules.

The present cost of this project on the basis of authorized personnel is $86,160 and that amount is requested for the project for the fiscal year 1939.

9. Legal activities.-There is submitted below a summary of the major legal activities accomplished by the Commission during the past year. These are briefed herein in order that some idea may be obtain of the magnitude, importance and complexity of the functions included in this project. Insofar as statistics were available, they have been included to indicate the volume of work performed. No attempt will be made to forecast the volume or variety of our functions under this project for the fiscal year 1939, because, in the first place, if any bases other than past accomplishments were used, they would be mostly matters of conjecture, and, in the second place, accomplishments along legal lines during the past year should not be used as the base for 1939 requirements because (1) due to lack of funds, the Commission has not occupied the total field of jurisdiction granted to it under the Securities Exchange Act of 1934; (2) the Commission has not been able to conduct all of the investigations deemed necessary to assure complete enforcement of the Securities Act of 1933 and the Securities Exchange Act of 1934, but has been compelled by fiscal limitations to investigate only the most flagrant cases; (3) the Commission has only taken its first step in the regulation of over-the-counter markets by prescribing a system for the registration of brokers and dealers in these markets, but that step is recognized as a mere initial move in the beginning of a comprehensive program; and (4) by the end of the fiscal year 1938 it is expected that the Supreme Court will have ruled on the constitutionality of the registration sections of the Public Utility Holding Company Act of 1935.

Three hundred and ninety-three thousand, two hundred and nine dollars was actually spent on this project during the fiscal year 1937, but some of the personnel on the project were appointed around or after the middle of the year. Therefore, it will cost considerably more for the project during the 1938 fiscal year. Our estimated requirements for the 1938 amount to $459,560. These estimates provide for a like amount for this project in the fiscal year 1939. A description of the principal functions included in this project follows: (a) Complaints, informal and formal investigations. During the 10-month period, September 1, 1936, to June 30, 1937, the Commission received approximately 8,940 letters complaining of the fraudulent and other illegal activities of persons engaged in the sale of securities. If the information indicated a substantial possibility of a violation of any of the acts administered by the Commission, it was handled as a complaint case, and the facts thereof were investigated informally. During the past year 678 new complaint cases were set up.

If an informal investigation disclosed no violation of the legislation administered by the Commission, or if sufficient facts did not appear to warrant a belief that there had been a violation, the case was closed at that point and no further action was taken by the Commission.

If as a result of the informal investigation, sufficient facts were developed to warrant institution of civil or criminal proceedings, appropriate action along those lines was immediately taken. Where enough facts were not elicited in the course of an informal investigation to merit court proceedings, but substantial basis existed for the belief that the legislation administered by the Commission had in some respects, been violated, a formal order for investigation was authorized, as provided by sections 19 and 20 of the Securities Act of 1933 and section 21 of the Securities Exchange Act of 1934. These formal orders empowered designated officers of the Commission to administer oaths and affirmations, subpena witnesses, take evidence, and require the production of any books, papers, correspondence, memoranda, or other records which were relevant or material to the inquiry. If facts indicating a violation of any of the acts administered by the Commission were discovered in a formal investigation, such action as was deemed most fitting to the circumstances was thereafter undertaken. But if the facts as developed in the formal investigation indicated that no violation had taken place, the case was closed.

The following table indicates the number of complaints, formal and informal investigations, handled under this project during the fiscal year ended June 30,

1937: