Penalty for Holding

The New Deal's Public Utility Holding Company Act of 1935 is a knout which can be used to flay the backs of investment bankers holding controlling blocks of utilities stock. The act's description of a holding company fits any investment house which directly or indirectly controls more than 10% of a utility's voting stock. Such a house feels the knout until: 1) it gets rid of its holdings; or 2) registers as a holding company, thereby submitting to SEC regulation, a penitential hair shirt which no investment banker wants to wear.

Until last week no U. S. underwriter has had to bare its back to SEC's holding-company lash. Soon after the Supreme Court upheld the registration provision of the act, Manhattan's Stone & Webster, Inc. divested itself of utilities securities (by giving its holdings to its stockholders) and settled back to its own business of construction, management and investment banking. International Paper & Power Co., no banker but a potent holder of utilities stock, woke up one morning to find that it might become a holding company. It finally escaped by turning over its shares of International Hydro-Electric System, with SEC's approval, to a liquidating trust to be sold.

An investment house which took neither alternative was Chicago's H. M. Byllesby & Co. Since 1910, when it organized Standard Gas & Electric Co., Byllesby has kept control of Standard, a utility empire with 105 subsidiaries selling gas, electric and traction service to 6,200,000 customers from Pittsburgh to San Diego. Byllesby's control of Standard was challenged in 1929 when an ambitious young financier, Victor Emanuel of Manhattan, began buying into the company. In that fight for control Standard stock went from $60 to $245 a share and Emanuel's syndicate (which later became United States Electric Power Corp.) threatened Byllesby's position enough to force a compromise. Under this deal Byllesby kept control of the board, but promised U. S. E. P. 75% of future underwriting of Standard's securities. Byllesby kept 25%.

In recent years U. S. E. P. sold out its holdings and the right to 75% of Standard's underwriting to an assorted banking group (which still includes Syndicateer Emanuel). But Byllesby still kept control, still had a pretty thing in being able to parcel out 25% of the underwriting to itself.

One day in November 1936, mindful 1) that more than 40% of its earnings came from Standard and 2) that it did not want to register as a holding company, Byllesby & Co. transferred its holdings in Standard to a voting trust. The trustees were three tried & true Byllesby men; all of them key Byllesby officers for years. Next day Byllesby & Co. asked SEC to rule that since Byllesby no longer controlled Standard it was exempt from the Holding Company Act. Later these three resigned, were replaced by two trustees having less obvious Byllesby connections, but to no avail.

Last week, SEC gave its answer: denied the application. Byllesby & Co. got 60 days to "make such adjustments as they deem necessary," i.e., get out of Standard Gas and give up its 25% slice of Standard investment issues or register as a holding company and perhaps lay its head on the block for the SEC's death sentence. Said Byllesby Vice President Joseph H. Briggs: "It appears the only course open is liquidation of the voting trust and sale of the stock." From SEC came ominous rumbles that other investment houses may also feel the knout.

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