SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM U-1
AMENDED AND RESTATED APPLICATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Fidelity Management & Research Company
82 Devonshire Street F7D
Boston, Massachusetts 02109-3614
Fidelity Management Trust Company
82 Devonshire Street F7D
Boston, Massachusetts 02109-3614
--------------------------------
(Names of companies filing this statement and
addresses of principal executive offices)
________________
Fidelity Management & Research Company
82 Devonshire Street F7D
Boston, Massachusetts 02109-3614
--------------------------------
(Names and addresses of agents for service)
The Commission is also requested to send copies of any
communications in connection with this matter to:
Joanne C. Rutkowski, Esq. Kimberly Phillips, Esq.
Reid & Priest LLP Reid & Priest LLP
Market Square 40 West 57th Street
701 Pennsylvania Avenue New York, New York 10019
Suite 800
Washington, D.C. 20004
Item I. Description of Proposed Transaction.
-----------------------------------
Fidelity Management & Research Company ("FMR Co.") and Fidelity
Management Trust Company ("FMTC") (FMR Co. and FMTC, are herein
collectively referred to as "Fidelity" or the "Applicant"), anticipate that
the funds and accounts managed by them will receive, in the aggregate, more
than ten percent of the voting securities of the public utility company El
Paso Electric Company ("El Paso") pursuant to El Paso's Fourth Amended Plan
of Reorganization, dated October 27, 1995 ("Fourth Plan of
Reorganization"). The ownership of such securities by the various funds or
accounts managed by Fidelity should not result in Fidelity becoming a
holding company under the Public Utility Holding Company Act of 1935, as
amended (the "Act"). However, positing solely for purposes of this
application that the voting interests of the various funds or accounts
managed by Fidelity could be aggregated, Fidelity requests an order under
section 3(a)(4), or in the alternative, section 3(a)(3) of the Act,
exempting it from regulation as a holding company.
The Disclosure Statement dated October 27, 1995, filed in connection
with the Fourth Plan of Reorganization ("Disclosure Statement"), indicates
that by operation of the Fourth Plan of Reorganization, Fidelity will
receive, in addition to cash and debt securities, voting securities of the
reorganized El Paso, in exchange for previously contracted bona fide debt
---- ----
of El Paso. Fidelity plans to hold the voting securities for investment
purposes only, and will reduce its interests to less than ten percent of
the outstanding voting securities of the reorganized El Paso as soon as it
is financially reasonable, consistent with Fidelity's fiduciary obligations
to its investors. Accordingly, Fidelity requests an exemption, for three
years from the date that it acquires the voting securities of the
reorganized El Paso, on the basis that it will be only "temporarily a
holding company" within the meaning of section 3(a)(4), and entitled to
exemption under that section.
In the alternative, Fidelity urges the Commission to grant it an
exemption under the plain meaning of section 3(a)(3). Fidelity is
primarily engaged in investment management. It is only incidentally a
holding company by reason of its ownership of the El Paso voting securities
pursuant to the operation of the Fourth Plan of Reorganization. Fidelity
will not derive a material amount of income from its holdings of El Paso
voting securities.
As explained more fully herein, the proposed exemption will not result
in detriment to the public interest or the interest of investors or
consumers. If an exemption is granted, Fidelity's parent FMR Corp. and its
controlling shareholders will claim exemption from regulation pursuant to
rule 10(a)(2).
The Disclosure Statement was approved by the Bankruptcy Court on
November 7, 1995, and the hearing on confirmation of the Fourth Amended
Plan of Reorganization is scheduled on January 9, 1996. It is a condition
precedent to confirmation that Fidelity not be required to register as a
holding company under the Act, and that the reorganized El Paso not be a
subsidiary company of a registered holding company. Accordingly, Fidelity
requests expedited consideration of its application, and asks the
Commission to issue an order in this matter no later than January 8, 1996.
A. Description of Fidelity
-----------------------
FMR Co. is an investment adviser registered under section 203 of the
Investment Advisers Act of 1940, as amended, and FMTC is a bank as defined
in section 3(a)(6) of the Securities Exchange Act of 1934, as amended. FMR
Co. and FMTC are each Massachusetts corporations and wholly-owned
subsidiaries of a third Massachusetts corporation, FMR Corp., which is also
engaged in various other businesses.
FMR Co. provides investment advisory services to investment companies
which are registered under section 8 of the Investment Company Act of 1940,
as amended, and serves as investment adviser to certain other funds which
are generally offered to limited groups of investors (the "Funds"). FMTC
serves as trustee or investment manager for various private investment
accounts, primarily employee benefit plans (the "Accounts").
Fidelity is principally engaged in the business of investment
management. Fidelity affiliates are also involved in various other lines
of business including, but not limited to, venture capital asset
management, securities brokerage, transfer and shareholder servicing, and
real estate development. As of August 31, 1995, the Applicant had assets
under management of approximately $373.6 billion.
Neither the Applicant nor any of its affiliates is presently a "public
utility company" or a "holding company" under the Act.
B. Description of El Paso Electric Company
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(1) General
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According to the Disclosure Statement, El Paso is a public utility
company which generates and distributes electricity in El Paso, Texas and
in an area of the Rio Grande Valley in western Texas and southern New
Mexico, and sells electricity to wholesale customers in southern
California, New Mexico, Texas, and Mexico. Its interconnected system
serves approximately 271,000 customers and covers an estimated population
of 818,000. El Paso had revenues of approximately $550 million in 1994.
El Paso's size, based on the areas it services and its earnings, is small
relative to other public utility companies in the United States.
(2) El Paso's Bankruptcy
--------------------
On January 8, 1992, El Paso filed a petition for relief under Chapter
11 of the United States Bankruptcy Code. During the year following the
Chapter 11 filing, El Paso negotiated with creditors and equity holders to
structure two different plans of reorganization. The plans were
unsuccessful.
Also during this period, Southwestern Public Service Company and
Central and South West Corporation ("CSW") separately entered into
negotiations to acquire El Paso. On May 5, 1993, El Paso filed a third
plan of reorganization under which El Paso would have become a wholly-owned
subsidiary of CSW. Pursuant to the merger agreement between CSW and El
Paso, and the third plan of reorganization, Fidelity and other holders of
El Paso debt securities would have received a combination of debt and
equity of the reorganized El Paso, in exchange for the existing El Paso
debt securities.
As part of its distressed investment business, Fidelity had purchased
certain of El Paso's outstanding lease obligation bonds and secured lease
obligation bonds and unsecured debt prior to this time.<F1> During the two
<F1> A portion of Fidelity's investment activities include investments in
financially troubled companies. These investments, which may include
investments in debt or equity securities, as well as bank debt or trade
claims, involve companies that appear to possess sound management or strong
market franchises but nonetheless, for various reasons, are experiencing
financial difficulty.
-year period following the filing of the third plan of reorganization,
various Funds and Accounts continued to buy and sell El Paso securities.
At present, approximately twenty-one Funds and Accounts managed by the
Applicant now hold, in the aggregate, outstanding lease obligation bonds
and secured lease obligation bonds with face value of approximately $224
million and approximately $83 million of unsecured debt.<F2>
<F2> In addition, the Funds and Accounts hold El Paso secured debt with
face value of approximately $27 million and $33 million, respectively, of
the Rio Grande Resources Nuclear Fuel Facility. Under the Fourth Plan of
Reorganization, none of the secured debt will be exchanged for common stock
of the reorganized El Paso.
These debt securities were acquired for investment purposes, continue
to be held exclusively for such purposes and, at current market value,
represent approximately six one hundredths of a percent (0.06%) of the
assets under the Applicant's management and have produced a comparable
percentage of the Applicant's income since their acquisition.
According to the Disclosure Statement, on June 9, 1995, CSW terminated
the merger agreement. The negotiations thereafter between El Paso and its
debt and equity holders have focused on a stand-alone reorganization
involving, among other things, the distribution of cash, as well as first
mortgage bonds, preferred stock, and common stock of reorganized El Paso,
to holders of the lease obligation bonds and the secured lease obligation
bonds and unsecured debt. The Fourth Plan of Reorganization provides for
the distribution of eighty-five percent (85%) of the common stock of
reorganized El Paso to these creditors.<F3>
<F3> This percentage could increase to as much as ninety-nine and one-half
percent (99.5%) in the case that certain classes of El Paso stockholders
and persons with options to purchase El Paso stock reject the plan.
Fidelity thus has found itself in the position of expecting to receive
approximately twenty-six percent (26%) of the common stock of
reorganized El Paso.<F4>
<F4> This percentage could increase to as much as thirty percent (30%)
in the case described in footnote 3 above.
As a member of the Official Committee of Unsecured Creditors (the
"Creditors' Committee") in the El Paso Chapter 11 proceeding, Fidelity has
participated in the negotiation of the Fourth Plan of Reorganization. As
one of three co-chairs of the Creditors' Committee, Fidelity serves on a
five-member committee that will nominate nine new members of the Board of
Directors of the reorganized El Paso, and recommend one of those new
members for the position of Chief Executive Officer of the reorganized El
Paso.<F5>
<F5> The five member committee is made up of two members of the existing
Board of Directors and the three co-chairs of the Creditors' Committee.
The other four members will be existing members of the current Board. All
of these selections will be subject to the approval of the current Board of
Directors of El Paso.
The Creditors' Committee will be dissolved at the close of business on
the effective date of the Fourth Plan of Reorganization. Thereafter,
Fidelity will not be represented on the Board by any of its directors,
---
officers, or other employees. As a large shareholder, Fidelity may be
invited to attend meetings of reorganized El Paso's Board of Directors as
an observer, on a nonvoting basis.
As noted above, a confirmation hearing on the Fourth Amended Plan of
Reorganization is anticipated on January 9, 1996. It is a condition
precedent to confirmation that Fidelity not be required to register as a
holding company under the Act, and that the reorganized El Paso not be a
subsidiary company of a registered holding company. Accordingly, Fidelity
requests expedited consideration of its application, and asks the
Commission to issue an order in this matter no later than January 8, 1996.
Item II. Argument
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A. Fidelity will not be a holding company within the meaning of the
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Act.
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The voting securities of reorganized El Paso will be held by
approximately twenty-one separate entities, none of which will hold ten
percent (10%) or more of such voting securities. Unless these interests
are aggregated, Fidelity is not a holding company within the meaning of
section 2(a)(7) of the Act.
The Commission has not yet addressed the circumstances in which
utility interests owned or managed by a company such as Fidelity should be
aggregated. The facts of this matter demonstrate that Fidelity will not
exercise such a controlling influence over the management or policies of
the reorganized El Paso as to make it necessary or appropriate to aggregate
and so subject Fidelity to regulation as a holding company. Although
Fidelity has acted to protect its rights as a creditor in bankruptcy, its
role will substantially diminish following the effective date of the
reorganization.<F6>
<F6> The fact that Fidelity has actively participated in the negotiation of
the Fourth Plan of Reorganization does not alter the conclusion that the
company is entitled to an exemption under section 3(a). The Bankruptcy
Code requires creditors such as Fidelity to take affirmative action to
protect their claims. See, e.g., section 1141 of the Bankruptcy Code
--- ----
(confirmation of a plan of reorganization generally discharges debtor from
all claims that have not been provided for in the plan). The Commission
has implicitly sanctioned such actions as a necessary part of the
reorganization process. Northeast Utilities, Holding Co. Act Release No.
-------------------
25221 (Dec. 21, 1990), supplemented, Holding Co. Act Release No. 25273
------------
(March 15, 1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C.
-------------- ----------------------
Cir. 1992), and Eastern Utilities Associates, Holding Co. Act Release No.
----------------------------
25719 (Dec. 29, 1992), in which creditors actively negotiated plans of
reorganization in Seabrook-related bankruptcies. Further, as noted above,
the Creditors' Committee will be dissolved at the close of business on the
effective date of the Fourth Plan of Reorganization. Thereafter, Fidelity
will not be represented on the Board by any of its directors, officers, or
---
other employees.
Thereafter, Fidelity will vote to protect its interests as a shareholder,
but it will not be represented on the Board by any of its directors,
---
officers, or other employees. Further, although as a large shareholder
Fidelity may be invited to attend meetings of reorganized El Paso's Board
of Directors, it will participate as an observer only, on a nonvoting
basis.
In addition, Fidelity will continue to be extensively regulated by the
Commission under the Investment Advisers Act of 1940, as amended, and the
other federal securities laws, in its primary investment management
business.
Accordingly, Fidelity asserts that it will not be a holding company
within the meaning of the Act, with respect to the reorganized El Paso.
B. In the alternative, Fidelity would be entitled to an exemption
from regulation as a holding company.
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Positing solely for purposes of this application that the voting
interests should be aggregated, Fidelity would nonetheless be entitled to
an exemption under section 3(a)(4) or section 3(a)(3) of the Act.
(1) Section 3(a)(4) provides an exemption for a company such as
Fidelity that is temporarily a holding company, having acquired
utility securities in liquidation of a previously contracted bona
fide debt.
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Section 3(a)(4) of the Act provides an exemption from regulation under
the Act when holding company status is "temporary" in nature:
such holding company is temporarily a holding company solely by reason
of the acquisition of securities for purposes of liquidation or
distribution in connection with a bona fide debt previously contracted
or in connection with a bona fide arrangement for the underwriting or
distribution of securities.
The Commission in Manufacturers Trust Co., 9 S.E.C. 283 (1941), explained
-----------------------
that the language of section 3(a)(4) "clearly denotes a desire to give an
applicant thereunder a reasonable time in which it might dispose of its
public utility or holding company securities without being subject to the
Act." Id. at 288.
---
Cases under section 3(a)(4) have generally involved companies that
have acquired utility securities in connection with litigation, see, e.g.,
--- ----
Manufacturers Trust Co., 3 S.E.C. 845 (1939); reorganization proceedings,
-----------------------
see, e.g., National Supply Co. of Delaware, 1 S.E.C. 742 (Oct. 1, 1936) and
--- ---- -------------------------------
American Community Power Co., 1 S.E.C. 527 (June 26, 1936); or proceedings
----------------------------
under section 11 of the Act, see, e.g., Massachusetts Mutual Life Insurance
--- ---- -----------------------------------
Co., 9 S.E.C. 642 (June 17, 1942)). Although this matter presents a
---
different factual situation, in that Fidelity acquired the underlying debt
obligations as part of its distressed investment business, the principles
of section 3(a)(4) continue to apply. The exemption will not enable
Fidelity to exercise the same character of control as that exercised by
other utility holding companies. Rather, the exemption under section
3(a)(4) will give Fidelity a reasonable period of time in which to reduce
its El Paso holdings to less than ten percent of the utility's voting
securities, without becoming subject to regulation as a holding company
under the Act.
There is little discussion in the cases under section 3(a)(4). It
appears, however, that the Commission has focused on two issues: first,
whether the securities were acquired in connection with "a bona fide debt
previously contracted" and second, whether the applicant holds the
securities "temporarily" and "for the purposes of liquidation." See, e.g.,
--- ----
Halsey, Stuart & Co., Inc., 1 S.E.C. 323, 325 (1936).
--------------------------
The first requirement is clearly met. The need for exemption arises
solely because Fidelity will receive the voting securities of the
reorganized El Paso in exchange for previously contracted bona fide debt.
---- ----
The fact that Fidelity acquired the debt as part of its distressed
investments business does not affect Fidelity's right to an exemption. If
El Paso had been acquired by Central and South West Corporation pursuant to
the executed merger agreement, the debt acquired by Fidelity would have
been converted into a combination of cash and securities. Fidelity, in the
aggregate, would not have owned, controlled, or held, with power to vote
ten percent or more of the voting securities of the resulting company and,
so there would not have been an issue for Fidelity under the 1935 Act.
CSW's termination of the merger agreement necessitated a fourth
"stand-alone" plan of reorganization which is the subject of this filing.
Pursuant to the Fourth Plan, Fidelity will receive common stock of the
reorganized El Paso in exchange for the debt it now holds of the existing
El Paso. The exchange of equity for existing debt securities is mandated
by the debtor's financial problems; it is necessary to effect the
reorganization that will enable El Paso to emerge from bankruptcy as a
viable entity.
With respect to the second issue, the Commission has looked to the
intent of applicant to determine whether utility securities are held
"temporarily" and "for the purposes of liquidation," as required by the
statute. See, e.g., Halsey, Stuart & Co., Inc., 1 S.E.C. at 325. In that
--- ---- --------------------------
matter, the Commission cited a number of factors, including "the present
intention of applicant not to take an active part in the management of the
[utility] companies nor to hold these securities permanently," in support
of its grant of an exemption under section 3(a)(4).
In contrast, the Commission has denied an exemption where it found
that the applicant was not holding the utility securities for purposes of
litigation but, rather, had been formed solely for purposes of holding the
utility interests and was taking an active part in the management of its
utility subsidiaries. Manufacturers Trust Co., 4 S.E.C. 845 (1939)
-----------------------
(denying exemption to Utility Service Company). It is important to note
that the Commission did not deny the exemption on the basis of control per
---
se. Rather, the Commission denied the exemption because "the control is
--
not of a temporary character but is of the same character as that exercised
by other utility holding companies." Id. at 854.
---
It appears that this distinction has been lost or blurred with time.
The problem may be due, in part, to a footnote in which the Commission
attempted to distinguish matters in which it had granted exemptions: "In
each of these three cases securities were held temporarily and active
control over management was not exercised." Id. at n.11, citing Halsey,
--- -------
Stuart & Co., Inc., 1 S.E.C. 323 (1936), The National Supply Co. of
--------------------------
Delaware, 1 S.E.C. 742 (1936), and Stone & Webster & Blodget, Inc., 3
-------- -------------------------------
S.E.C. 234 (1938).
This language is unfortunate because it has been read by some
commentators to suggest that the exercise of "active" control is
inconsistent with the grant of an exemption under section 3(a)(4). Yet, in
at least one subsequent matter, the Commission expressly directed a section
3(a)(4) exempt company to exercise such control. In Manufacturers Trust
-------------------
Co., 9 S.E.C. 283, 288 (1941), the Commission noted that the distribution
---
of securities of "a problematical value" would be detrimental to the public
interest and the interest of investors and consumers, and so directed the
holding company to take the steps necessary to improve the capital
structure of certain of its utility subsidiaries. Id. at 289.
---
A fair reading of the decisions would be that control must be
consistent with an intention to liquidate the utility interests. Thus, in
the 1941 Manufacturers Trust decision, the Commission explained:
-------------------
It is our opinion that generally speaking the continued retention of
control of a financially sound public utility company by an
institution such as the applicant is in conflict with the policy of
the Act and is detrimental to the public interest and the interest of
investors and consumers. On the other hand, we are equally cognizant
of the harmful effect upon those same interests of the distribution of
securities of a problematical value.
Id. at 288 (emphasis added).
---
To the extent that Fidelity can be deemed to have exercised control in
this matter, it has been control consistent with an intention to liquidate
its El Paso interests. The Creditors' Committee will be dissolved at the
close of business on the effective date of the Fourth Plan of
Reorganization. Thereafter, Fidelity will not be represented on the Board
---
by any of its directors, officers, or other employees. As a large
shareholder, Fidelity may be invited to attend meetings of reorganized El
Paso's Board of Directors as an observer, on a nonvoting basis. Fidelity
does not intend to hold reorganized El Paso's voting securities permanently
in order to exercise control; rather, Fidelity intends to retain these
voting securities only temporarily, for investment purposes only, with the
intention to liquidate all or a significant portion thereof as soon as
reasonably practicable, consistent, of course with market conditions and
Fidelity's fiduciary obligations to its investors.
As contemplated by the Commission in Manufacturers Trust Co., Fidelity
-----------------------
seeks "a reasonable time in which it might dispose of its public utility or
holding company securities without being subject to the Act." 9 S.E.C. at
288. In its most recent decision in this area, the Commission granted an
exemption under section 3(a)(4) for a period of up to seven years. Coastal
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States -- Lo-Vaca Settlement Trust Mercantile National Bank at Dallas,
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Holding Co. Act Release No. 21104 (April 23, 1979). Fidelity believes,
however, that a three-year period would be appropriate to enable the funds
and accounts managed by it to reduce their holdings in the reorganized El
Paso in an orderly fashion, consistent with market conditions and
Fidelity's fiduciary obligations to its investors. In this regard,
Fidelity notes that the Commission has granted three-year "temporary"
exemptions in other recent matters. See Kansas Power & Light Co., Holding
--- ------------------------
Co. Act Release No. 25465 (Feb. 5, 1992) (three-year temporary exemption
under section 3(a)(2)), and CINergy Corp., Holding Co. Act Release No.
-------------
26146 (Oct. 21, 1994) (Commission reserved jurisdiction for three years
over issues related to gas operations and nonutility businesses of new
registered holding company). Fidelity believes that three years would
provide "an opportunity [for the reorganization of El Paso] to be reflected
in increased earnings and improved market prices." See Massachusetts
--- -------------
Mutual Life Insurance Co., 9 S.E.C. 642, 644 (1941).
-------------------------
Once the objective standards are met, section 3(a) directs the
Commission to grant an exemption "unless and except insofar as it finds the
exemption detrimental to the public interest or the interest of investors
or consumers." The "unless and except" clause "was designed to prevent the
exemption of any holding company which, although it might meet the formal
conditions under Section 3(a), is essentially the type of company at which
the purposes of the Act were directed." Cities Service Co., 8 S.E.C. 318,
------------------
335-36 (1940), citing S. Rep. No. 621, 74th Cong., 1st Sess. 24 (1935)
("Senate Report").
The Commission has traditionally relied upon the temporary nature of
the exemption under section 3(a)(4) to prevent the entrenchment of control
that would require regulation under the Act. Compare Manufacturers Trust
-------------------
Co., in which the Commission denied an exemption to Utility Service Company
---
because "the control is not of a temporary character but is of the same
character as that exercised by other utility holding companies." 4 S.E.C.
at 854. Fidelity does not intend to enter into any stand-alone
transactions with the reorganized El Paso. Further, none of the Fidelity
Funds or Accounts in this matter have as their objective the ownership of
large percentages of public utility companies. In addition, Fidelity has
represented to the New Mexico Commission that it will not directly or
indirectly cause any change in the policies or operations of the
reorganized El Paso, and that the Fidelity funds and accounts' ownership of
the common stock of the reorganized El Paso should not obstruct, diminish,
hinder, impair or unduly complicate the regulation and supervision of the
utility.
During this period, Fidelity will be subject to extensive reporting
requirements, both at the state and federal level. The oversight of these
regulators will help to ensure that the exemption will not result in
detriment to the public interest or the interest of investors or consumers.
El Paso will be subject to regulation by the Federal Energy Regulatory
Commission, the Texas Public Utility Commission and the New Mexico Public
Utility Commission. As the SEC has recognized, these other regulators are
primarily responsible for the protection of consumers.<F7>
<F7> Investors will be protected under the federal securities laws and the
Bankruptcy Code.
The legislative history of the Act makes clear that the statute was
intended "simply to provide a mechanism to create conditions under which
effective Federal and State regulation will be possible." Senate Report at
11 (discussing section 11, "the very heart of the title"). Indeed,
confirmation of the Fourth Plan of Reorganization is conditioned upon
receipt of certain approvals and determinations from these regulators.
El Paso will file reports supplied by Fidelity, with the New
Mexico Public Utility Commission within 45 days after June 30 and December
31 of each year, until the aggregate ownership of the voting securities of
the reorganized El Paso by the Fidelity Funds and Accounts is less than ten
percent. These reports will include the latest financial statements for
the Fidelity Funds and Accounts,<F8>
<F8> No financial statements will be presented for pension funds which are
managed in part by Fidelity. Because Fidelity manages only a small portion
of these pension funds, it does not have access to their financial
statements.
the holdings of reorganized El Paso common stock by the Fidelity Funds and
Accounts, individually and collectively, and any Schedule 13D or 13G
reports filed with respect to the reorganized El Paso. Fidelity will
file these same with this Commission.
Accordingly, Fidelity asks the Commission to issue an order granting
it an exemption from regulation as a holding company under the Act for a
period of up to three years from the date of acquisition of such voting
securities.
(2) Section 3(a)(3) provides an exemption for a company such as
Fidelity that is only incidentally a holding company.<F9>
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<F9> To the extent Fidelity is granted the requested exemption under
section 3(a)(4) of the Act, it will not seek to rely on the good-faith
temporary exemption associated with its filing under section 3(a)(3) of the
Act.
Fidelity is also entitled to an exemption under the plain meaning of
section 3(a)(3):
such holding company is only incidentally a holding company, being
primarily engaged or interested in one or more businesses other than
the business of a public-utility company and (A) not deriving,
directly or indirectly, any material part of its income from any one
or more subsidiary companies, the principal business of which is that
of a public-utility company, or (B) deriving a material part of its
income from any one or more such subsidiary companies, if
substantially all the outstanding securities of such companies are
owned, directly or indirectly, by such holding company.
Fidelity satisfies the objective criteria for the exemption. The Applicant
is primarily engaged in the business of investment management, and it will
derive an immaterial part of its income from the reorganized El Paso.
Fidelity recognizes that the Commission has traditionally interpreted
this section to require that the utility operations be "functionally
related" to the holding company's primary nonutility business (see Cities
--- -------
Service Co., 8 S.E.C. 318, 328-29 (Dec. 23, 1940)); and small in an
-----------
absolute sense (see Standard Oil Co., 10 S.E.C. 1122, 1128-29 (Feb. 5,
--- ----------------
1942), citing Cities Service). This restrictive interpretation was
--------------
intended to prevent the widespread evasion of regulation that could occur
if companies were able to avoid regulation as holding companies under the
Act simply "by acquiring and holding the stocks of companies doing some
business other than that of a retail utility business." Electric Bond and
-----------------
Share Co., 33 S.E.C. 21, 43 (Feb. 6, 1952). At that time, companies that
---------
controlled a significant part of the country's utility operations were
attempting, by one device or another, to defeat the purposes of the Act.
Fidelity is not a company that is attempting to escape regulation
under the Act by posturing itself as a company only incidentally investing
in utility operations. Rather, the Applicant is in the business of
investment management, and its anticipated holdings of the voting
securities of El Paso are merely derived from its primary business of
investment management. As noted above, the debt securities in this matter
represent, at current market value, approximately six one hundredths of a
percent (0.06%) of the assets under Fidelity's management and have produced
a comparable percentage of Fidelity's income since their acquisition.
It is appropriate for the Commission to liberalize its interpretation
of section 3(a)(3) in these circumstances. The Applicant's relationship
with El Paso is within the plain meaning of section 3(a)(3) and, as
explained above, the proposed exemption will not result in harm to utility
consumers. For these reasons, Fidelity should be granted an exemption from
regulation as a holding company under section 3(a)(3) of the Act. See Gaz
--- ---
Metropolitan, Inc. and Gaz Metropolitain and Company, Limited Partnership,
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Holding Co. Act Release No. 26170 (Nov. 23, 1994) (exemption granted under
section 3(a)(5) of the Act where the literal terms of the statute were
satisfied, and it appeared that the exemption would not be detrimental to
consumers).
C. Conclusion
----------
For the reasons set forth above, should the Applicant be classified as
a "holding company" under the Act upon the conversion of its El Paso debt
securities into voting securities of reorganized El Paso, the Applicant
requests an exemption from regulation as a holding company under the Act
pursuant to section 3(a)(4), or in the alternative, section 3(a)(3). As
explained above, confirmation of the Fourth Amended Plan of Reorganization
is anticipated on January 9, 1996. It is a condition precedent to
confirmation that Fidelity not be required to register as a holding company
under the Act, and that the reorganized El Paso not be a subsidiary company
of a registered holding company. Accordingly, Fidelity requests expedited
consideration of its application, and asks the Commission to issue an order
in this matter no later than January 8, 1995.
Item III. Applicable Statutory Provisions.
-------------------------------
FMR Co. and FMTC consider sections 2(a)(7), 3(a)(3) and 3(a)(4) of the
Act, and rule 10(a)(2) thereunder, to be applicable to the proposed
transaction. To the extent that the proposed transaction is considered by
the Commission to require authorization, approval or exemption under any
section of the Act or rules thereunder, other than those specifically
referred to above, request for such authorization, approval or exemption is
hereby made.
Item IV. New Mexico Regulatory Approval.
------------------------------
As a result of the debt/equity exchange contemplated by the Fourth
Plan of Reorganization, Fidelity may be deemed to be a public utility
holding company or an affiliated interest of the reorganized El Paso,
within the meaning of the New Mexico Public Utility Act. To the extent
that the approval of the New Mexico Public Utility Commission may be
required, Fidelity will either file for such approval or else request a
variance from the requirements of the New Mexico law. It is Fidelity's
understanding that the relevant New Mexico laws and regulations were not
intended to reach a situation such as this (in which Fidelity's equity
interest results from its position as a major unsecured creditor of a
utility in bankruptcy reorganization proceedings), and where Fidelity does
not have a specific intent to create a holding company under New Mexico law
or otherwise have El Paso diversify into nonregulated business activities.
Item V. Procedure.
---------
FMR Co. and FMTC request that the Commission issue its order as soon
as practicable but in any event no later than January 8, 1996. FMR Co. and
FMTC hereby (1) waive a recommended decision by a hearing officer or other
responsible officer of the Commission, (2) consent that the Division of
Investment Management may assist in the preparation of the Commission's
decision in this proceeding, and (3) request that there be no waiting
period between the issuance of the Commission's order and the date on which
it is to become effective.
Item VI. Exhibit
-------
A - Memorandum of Law
Item VII. Information as to Environmental Effects.
---------------------------------------
(a) The Commission's action in this matter will not constitute any
major federal action significantly affecting the quality of the human
environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transaction.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned companies have duly caused this statement to be
signed on their behalf by the undersigned thereunto duly authorized.
FIDELITY MANAGEMENT &
RESEARCH COMPANY,
on its own behalf and
on behalf of certain funds and accounts
managed by it
By: /s/ Daniel G. Harmetz
______________________
FIDELITY MANAGEMENT
TRUST COMPANY,
on its own behalf and
on behalf of certain funds and accounts
managed by it
Date: January 2, 1996 By: /s/ Daniel G. Harmetz
______________________
EXHIBIT A
MEMORANDUM OF LAW IN OPPOSITION TO
REQUEST FOR INTERVENTION, AND FOR REJECTION OR HEARING
BY THE CITY OF LAS CRUCES, NEW MEXICO
INTRODUCTION
Fidelity has requested an order of exemption under section 3(a)(4) or,
in the alternative, section 3(a)(3) of the Public Utility Holding Company
Act of 1935 ("Act"), in connection with the reorganization proceedings of
El Paso Electric Company, a debtor-in-possession under Chapter 11 of the
Bankruptcy Code. As explained more fully in Fidelity's application, El
Paso has proposed a plan of reorganization in which, among other things,
debt securities now held by the various funds or accounts managed by
Fidelity would be exchanged for common stock of the reorganized El Paso.
The ownership of such securities by the various funds or accounts
managed by Fidelity should not result in Fidelity becoming a holding
company within the meaning of the Act. Fidelity is not, however, seeking a
declaratory order under section 2(a)(7) of the Act. Rather, positing
solely for purposes of this application that the voting interests of the
various funds or accounts managed by Fidelity could be aggregated, Fidelity
requests an order under section 3(a)(4), or in the alternative, section
3(a)(3) of the Act, exempting it from regulation as a holding company.
The City of Las Cruces has intervened, raising various challenges to
Fidelity's application. As discussed more fully below, the arguments
raised by the City are inapposite or irrelevant to the matters properly
before the Commission, namely the requests for exemption under section 3(a)
of the Act. Indeed, the City's intervention does not appear intended to
address the protection of the public interest, or the interest of investors
or consumers, the protected interests under the Act. To the contrary, it
appears the intervention is intended simply to create leverage for the City
in an unrelated matter concerning the City's attempt to municipalize
certain transmission and distribution facilities owned by the debtor El
Paso. See Intervention at 7 (expressing concern that Fidelity could
---
"strongly influence [El Paso's] decisions on matters concerning Las Cruces'
plans to acquire [El Paso] assets in order to form an operating municipal
electric utility").
The Commission, in the past, has rejected efforts by intervenors to
link unrelated contractual disputes to matters properly before the
Commission. See, e.g., Northeast Utilities, Holding Co. Act Release No.
--- ---- -------------------
25565 (June 29, 1992). It is clear that the intervention in this matter is
but a thinly veiled attempt to gain advantage in an unrelated controversy.
Accordingly, the Commission should deny the City of Las Cruces' request for
rejection or hearing, and to issue an order granting Fidelity an exemption
from regulation as a holding company for a period of up to three years.
ANALYSIS
1. THE CITY'S FIRST ARGUMENT IS MOOT BECAUSE FIDELITY IS DEEMED TO BE A
HOLDING COMPANY FOR PURPOSES OF THIS APPLICATION.
The City has devoted the greater part of its intervention to an
argument that Fidelity should be deemed to be a holding company within the
meaning of the Act. The issue is moot because Fidelity is conceding
holding company status for purposes of this application. Thus, the
arguments set forth on pages 7 through 17 of the City's intervention are
irrelevant to Fidelity's application for an order of exemption as a holding
company.
In any event, the City errs as a matter of law in its recurring
argument (at pages 4, 13 and 14 of the City's intervention) that Fidelity
could accept nonvoting securities in the El Paso reorganization proceeding.
Section 1123(a)(6) of the Bankruptcy Code expressly prohibits the issuance
of nonvoting equity securities under a plan of reorganization. 11 U.S.C.
Section 1123(a)(6) (the charter of the reorganized debtor must include "a
provision prohibiting the issuance of nonvoting equity securities"). This
section codifies a position long supported by the SEC that participation in
and control of the selection of the management of a reorganized debtor must
be considered as part of a fair and equitable plan of reorganization, and
provided for accordingly. See 5 Collier on Bankruptcy, para. 1123.01 at
---
1123-14 (15th ed.), citing the S.E.C. Report on the Study and Investigation
of the Work, Activities, Personnel and Functions of Protective Committees,
Part I 903 (1937) and Part VIII 156-159 (1940).
2. THE CITY'S SECOND ARGUMENT IS INAPPOSITE BECAUSE FIDELITY IS ENTITLED
TO AN EXEMPTION UNDER SECTION 3(A)(4) OF THE ACT.
Section 3(a)(4) provides an exemption for a company such as Fidelity
that is temporarily a holding company, having acquired utility securities
in liquidation of a previously contracted bona fide debt. By operation of
the Fourth Plan of Reorganization, Fidelity will receive, in addition to
cash and debt securities, voting securities of the reorganized El Paso, in
exchange for previously contracted bona fide debt of El Paso. Fidelity
---- ----
plans to hold the voting securities for investment purposes only, and will
reduce its interests to less than ten percent of the outstanding voting
securities of the reorganized El Paso as soon as it is financially
reasonable, consistent with Fidelity's fiduciary obligations to its
investors.
A. FIDELITY SATISFIES THE OBJECTIVE REQUIREMENTS FOR EXEMPTION UNDER
SECTION 3(A)(4).
Section 3(a)(4) directs the Commission to exempt a holding company if:
such holding company is temporarily a holding company solely by reason
of the acquisition of securities for purposes of liquidation or
distribution in connection with a bona fide debt previously contracted
or in connection with a bona fide arrangement for the underwriting or
distribution of securities.
The Commission in Manufacturers Trust Co., 9 S.E.C. 283 (1941), explained
----------------------
that the language of section 3(a)(4) "clearly denotes a desire to give an
applicant thereunder a reasonable time in which it might dispose of its
public utility or holding company securities without being subject to the
Act." Id. at 288.
---
The Commission has focused on two issues: first, whether the
securities were acquired in connection with "a bona fide debt previously
contracted" and second, whether the applicant holds the securities
"temporarily" and "for the purposes of liquidation." See, e.g., Halsey,
--- ---- ------
Stuart & Co., Inc., 1 S.E.C. 323, 325 (1936). Both requirements are met in
------------------
this matter.
FIDELITY WILL BECOME A HOLDING COMPANY SOLELY BY REASON OF THE
ACQUISITION OF SECURITIES OF THE REORGANIZED EL PASO IN CONNECTION
WITH A BONA FIDE DEBT PREVIOUSLY CONTRACTED.
With respect to the first issue, the need for exemption arises solely
because Fidelity will receive the voting securities of the reorganized El
Paso in exchange for previously contracted bona fide debt. There is little
---- ----
recent precedent under section 3(a)(4). The older cases under section
3(a)(4) generally involved companies that had acquired utility securities
in connection with litigation, see, e.g., Manufacturers Trust Co., 4 S.E.C.
--- ---- -----------------------
845 (1939); reorganization proceedings, see, e.g., National Supply Co. of
--- ---- ----------------------
Delaware, 1 S.E.C. 742 (Oct. 1, 1936) and American Community Power Co., 1
-------- ----------------------------
S.E.C. 527 (June 26, 1936); or proceedings under section 11 of the Act,
see, e.g., Massachusetts Mutual Life Insurance Co., 9 S.E.C. 642 (June 17,
--- ---- ---------------------------------------
1942). Although this matter presents a different factual situation, in
that Fidelity acquired the underlying debt obligations as part of its
distressed investment business, the principles of section 3(a)(4) continue
to apply. The exemption will not enable Fidelity to exercise the same
character of control as that exercised by other utility holding companies.
Rather, the exemption under section 3(a)(4) will give Fidelity a reasonable
period of time in which to reduce its El Paso holdings to less than ten
percent (10%) of the utility's voting securities, without becoming subject
to regulation as a holding company under the Act.
The City of Las Cruces argues that the exemption should be denied
because Fidelity acquired the El Paso debt securities as part of its
distressed investment business. Intervention at 5 and 20. The fact that
Fidelity acquired the debt "primarily because they were considered good
business" (Intervention at 20, quoting Manufacturers Trust Co., 4 S.E.C. at
-----------------------
852) does not affect Fidelity's right to an exemption. Section 3(a)(4)
requires only that the underlying debt be "bona fide" and "previously
contracted." Although the legislative history is silent on this point, it
appears reasonable to assume that Congress was concerned with preventing
sham transactions that could adversely affect the interests of investors
and consumers. There was no sham transaction in this matter. Indeed,
Fidelity was not involved in the issuance of the El Paso debt securities.
Further, the securities were largely acquired at a time when it was
contemplated that El Paso would be acquired by Central and South West
Corporation pursuant to an executed merger agreement. If that merger had
been consummated, the debt acquired by Fidelity would have been converted
into a combination of cash and securities. Fidelity, in the aggregate,
would not have owned, controlled, or held, with power to vote ten percent
or more of the voting securities of the resulting company and, so there
would not have been an issue for Fidelity under the 1935 Act.
As explained more fully in the application, CSW's termination of the
merger agreement necessitated a fourth "stand-alone" plan of reorganization
which is the subject of this filing. Pursuant to the Fourth Plan, Fidelity
will receive common stock of the reorganized El Paso in exchange for the
debt it now holds of the existing El Paso. The exchange of equity for
existing debt securities is mandated by the debtor's financial problems; it
is necessary to effect the reorganization that will enable El Paso to
emerge from bankruptcy as a viable entity. Accordingly, Fidelity asks the
Commission to reject the City's arguments in this regard.
FIDELITY WILL HOLD THE VOTING SECURITIES OF THE REORGANIZED
EL PASO TEMPORARILY AND SOLELY FOR PURPOSES OF LIQUIDATION.
With respect to the second issue, the Commission has looked to the
intent of applicant to determine whether utility securities are held
"temporarily" and "for the purposes of liquidation," as required by the
statute. See, e.g., Halsey, Stuart & Co., Inc., 1 S.E.C. at 325. In the
--- ---- --------------------------
Halsey decision, the Commission cited a number of factors, including "the
------
present intention of applicant not to take an active part in the management
of the [utility] companies nor to hold these securities permanently," in
support of its grant of an exemption under section 3(a)(4). In contrast,
the Commission has denied an exemption where it found that the applicant
was not holding the utility securities for purposes of litigation but,
rather, had been formed solely for purposes of holding the utility
interests and was taking an active part in the management of its utility
subsidiaries. Manufacturers Trust Co., 4 S.E.C. 845 (1939) (denying
-----------------------
exemption to Utility Service Company).
It is important to note that the Commission did not deny the Utility
Service exemption on the basis of control per se. Rather, the Commission
--- --
denied the exemption because "the control is not of a temporary character
but is of the same character as that exercised by other utility holding
companies." Id. at 854.
---
This distinction has been lost or blurred with time. The problem may
be due, in part, to a footnote in which the Commission attempted to
distinguish matters in which it had granted exemptions: "In each of these
three cases securities were held temporarily and active control over
management was not exercised." Id. at n.11, citing Halsey, Stuart & Co.,
--- ---------------------
Inc., 1 S.E.C. 323 (1936), The National Supply Co. of Delaware, 1 S.E.C.
---- -----------------------------------
742 (1936), and Stone & Webster & Blodget, Inc., 3 S.E.C. 234 (1938). This
-------------------------------
language is unfortunate because it has been read by some commentators to
suggest that the exercise of "active" control is inconsistent with the
grant of an exemption under section 3(a)(4). Yet, in at least one
subsequent matter, the Commission expressly directed a section 3(a)(4)
exempt company to exercise such control. In Manufacturers Trust Co., 9
-----------------------
S.E.C. 283, 288 (1941), the Commission noted that the distribution of
securities of "a problematical value" would be detrimental to the public
interest and the interest of investors and consumers, and so directed the
holding company to take the steps necessary to improve the capital
structure of certain of its utility subsidiaries. Id. at 289.
---
A fair reading of the decisions would be that control must be
consistent with an intention to liquidate the utility interests. Thus, in
the 1941 Manufacturers Trust decision, the Commission explained:
-------------------
It is our opinion that generally speaking the continued retention of
control of a financially sound public utility company by an
institution such as the applicant is in conflict with the policy of
the Act and is detrimental to the public interest and the interest of
investors and consumers. On the other hand, we are equally cognizant
of the harmful effect upon those same interests of the distribution of
securities of a problematical value.
Id. at 288 (emphasis added). In this matter, to the extent that control or
---
a controlling influences can be deemed to exist, it is consistent with
Fidelity's intention to liquidate its El Paso interests. The Creditors'
Committee will be dissolved at the close of business on the effective date
of the Fourth Plan of Reorganization. Thereafter, Fidelity will not be
---
represented on the Board by any of its directors, officers, or other
employees. As a large shareholder, Fidelity may be invited to attend
meetings of reorganized El Paso's Board of Directors as an observer, on a
nonvoting basis. Fidelity does not intend to hold reorganized El Paso's
voting securities permanently in order to exercise control; rather,
Fidelity intends to retain these voting securities only temporarily, for
investment purposes only, with the intention to liquidate all or a
significant portion thereof as soon as reasonably practicable, consistent,
of course with market conditions and Fidelity's fiduciary obligations to
its investors.
As contemplated by the Commission in Manufacturers Trust Co., Fidelity
-----------------------
seeks "a reasonable time in which it might dispose of its public utility or
holding company securities without being subject to the Act." 9 S.E.C. at
288. In its most recent decision in this area, the Commission granted an
exemption under section 3(a)(4) for a period of up to seven years. Coastal
-------
States -- Lo-Vaca Settlement Trust Mercantile National Bank at Dallas,
----------------------------------------------------------------------
Holding Co. Act Release No. 21104 (April 23, 1979). The City of Las
Cruces, in its intervention, suggests that a protracted period may be
required for El Paso's recovery due to the effect of factors such as
nuclear dependence, financial duress, and the changing nature of the
electric industry. Fidelity believes, however, that a three-year period
would be appropriate to enable the funds and accounts managed by it to
reduce their holdings in the reorganized El Paso in an orderly fashion,
consistent with market conditions and Fidelity's fiduciary obligations to
its investors. See Affidavit of Judy K. Mencher, attached hereto. In this
---
regard, Fidelity notes that the Commission has granted three-year
"temporary" exemptions in other recent matters. See Kansas Power & Light
--- --------------------
Co., Holding Co. Act Release No. 25465 (Feb. 5, 1992) (three-year temporary
---
exemption under section 3(a)(2)), and CINergy Corp., Holding Co. Act
-------------
Release No. 26146 (Oct. 21, 1994) (Commission reserved jurisdiction for
three years over issues related to gas operations and nonutility businesses
of new registered holding company). Fidelity believes that three years
would provide "an opportunity [for the reorganization of El Paso] to be
reflected in increased earnings and improved market prices." See
---
Massachusetts Mutual Life Insurance Co., 9 S.E.C. 642, 644 (1941).
---------------------------------------
B. THE TEMPORARY EXEMPTION WILL NOT BE DETRIMENTAL TO THE PROTECTED
INTERESTS.
Once the objective standards are met, section 3(a) directs the
Commission to grant an exemption "unless and except insofar as it finds the
exemption detrimental to the public interest or the interest of investors
or consumers." The "unless and except" clause "was designed to prevent the
exemption of any holding company which, although it might meet the formal
conditions under Section 3(a), is essentially the type of company at which
the purposes of the Act were directed." Cities Service Co., 8 S.E.C. 318,
------------------
335-36 (1940), citing S. Rep. No. 621, 74th Cong., 1st Sess. 24 (1935)
("Senate Report").
The Commission has traditionally relied upon the temporary nature of
the exemption under section 3(a)(4) to prevent the entrenchment of control
that would require regulation under the Act. Compare Manufacturers Trust
-------------------
Co., in which the Commission denied an exemption to Utility Service Company
---
because "the control is not of a temporary character but is of the same
character as that exercised by other utility holding companies." 4 S.E.C.
at 854. The City of Las Cruces acknowledges that there will not be a
traditional holding company-utility relationship but nonetheless contends
there will be a risk of abusive practices if Fidelity is granted an
exemption. Intervention at 7. Specifically, the City suggests that it
(and the Commission) could be denied information concerning Fidelity's
transactions with El Paso. Id. The basis for this concern is unclear.
---
Fidelity does not intend to enter into any stand-alone transactions with
the reorganized El Paso. Further, none of the Fidelity Funds or Accounts
in this matter have as their objective the ownership of large percentages
of public utility companies. In addition, Fidelity has represented to the
New Mexico Commission that it will not directly or indirectly cause any
change in the policies or operations of the reorganized El Paso, and that
the Fidelity Funds and Accounts' ownership of the common stock of the
reorganized El Paso should not obstruct, diminish, hinder, impair or unduly
complicate the regulation and supervision of the utility.
Finally, during this period, Fidelity will be subject to extensive
reporting requirements, both at the state and federal level. The oversight
of these regulators will help to ensure that the exemption will not result
in detriment to the public interest or the interest of investors or
consumers. El Paso will be subject to regulation by the Federal Energy
Regulatory Commission, the Texas Public Utility Commission and the New
Mexico Public Utility Commission. As the SEC has recognized, these other
regulators are primarily responsible for the protection of consumers.
<F1> Investors will be protected under the federal securities laws and the
Bankruptcy Code.
The legislative history of the Act makes clear that the statute was
intended "simply to provide a mechanism to create conditions under which
effective Federal and State regulation will be possible." Senate Report at
11 (discussing section 11, "the very heart of the title"). Indeed,
confirmation of the Fourth Plan of Reorganization is conditioned upon
receipt of certain approvals and determinations from these regulators.
Fidelity will file reports with this Commission and with the New
Mexico Public Utility Commission within 45 days after June 30 and December
31 of each year, until the aggregate ownership of the voting securities of
the reorganized El Paso by the Fidelity Funds and Accounts is less than ten
percent. These reports will include the latest financial statements for
the Fidelity Funds and Accounts,
<F2> No financial statements will be presented for pension funds which are
managed in part by Fidelity. Because Fidelity manages only a small
portion of these pension funds, it does not have access to their
financial statements.
the holdings of reorganized El Paso common stock by the Fidelity Funds and
Accounts, individually and collectively, and any Schedule 13D or 13G
reports filed with respect to the reorganized El Paso.
Las Cruces further argues that the exemption should be denied so that
the Commission can retain jurisdiction over Fidelity's disposition of the
El Paso stock. Intervention at 11-12. The Commission will, however,
retain jurisdiction over the acquisition of the securities under sections 9
and 10 of the Act. See Senate Report at 30 (Congress intended these
---
provisions "to give the Commission supervision over the future development
of utility holding company systems"); see also H.R. Rep. No. 1308, 74th
--- ----
Cong., 1st Sess. 16 (1935) (section 10 is intended to prevent acquisitions
that would be "attended by the evils which have featured the past growth of
holding companies"), cited in American Electric Power Co., Inc., 46 S.E.C.
---------------------------------
1299, 1306 (1978).
Finally, section 3(c) of the Act authorizes the Commission to revoke
an order of exemption if it finds that the circumstances that gave rise to
the exemption no longer exist. Thus, if subsequent events indicate that
the exemption is detrimental to the protected interests, the Commission
may, on its own motion, address any perceived problems. But see Halsey,
--- --- -------
Stuart & Co., Inc., 1 S.E.C. at 326 ("Of course, no such revocation or
------------------
modification of the order can be made without first giving the parties in
interest due notice and opportunity for hearing.").
Accordingly, the Commission should grant Fidelity an order of
exemption under section 3(a)(4).
3. IN THE ALTERNATIVE, FIDELITY IS ENTITLED TO AN EXEMPTION UNDER SECTION
3(A)(3).
Section 3(a)(3) of the Act provides an exemption from regulation as a
holding company where:
such holding company is only incidentally a holding company, being
primarily engaged or interested in one or more businesses other than
the business of a public-utility company and (A) not deriving,
directly or indirectly, any material part of its income from any one
or more subsidiary companies, the principal business of which is that
of a public-utility company, or (B) deriving a material part of its
income from any one or more such subsidiary companies, if
substantially all the outstanding securities of such companies are
owned, directly or indirectly, by such holding company.
Fidelity satisfies the objective criteria for the exemption. The Applicant
is primarily engaged in the business of investment management, and it will
derive an immaterial part of its income from the reorganized El Paso.
Fidelity recognizes that the Commission has traditionally interpreted
this section to require that the utility operations be "functionally
related" to the holding company's primary nonutility business (see Cities
--- ------
Service Co., 8 S.E.C. 318, 328-29 (Dec. 23, 1940)); and small in an
-----------
absolute sense (see Standard Oil Co., 10 S.E.C. 1122, 1128-29 (Feb. 5,
--- ----------------
1942), citing Cities Service). This restrictive interpretation was
--------------
intended to prevent the widespread evasion of regulation that could occur
if companies were able to avoid regulation as holding companies under the
Act simply "by acquiring and holding the stocks of companies doing some
business other than that of a retail utility business." Electric Bond and
-----------------
Share Co., 33 S.E.C. 21, 43 (Feb. 6, 1952). At that time, companies that
---------
controlled a significant part of the country's utility operations were
attempting, by one device or another, to defeat the purposes of the Act.
Fidelity is not a company that is attempting to escape regulation
under the Act by posturing itself as a company only incidentally investing
in utility operations. Rather, the Applicant is in the business of
investment management, and its anticipated holdings of the voting
securities of El Paso are merely derived from its primary business of
investment management. As noted above, the debt securities in this matter
represent, at current market value, approximately six one hundredths of a
percent (0.06%) of the assets under Fidelity's management and have produced
a comparable percentage of Fidelity's income since their acquisition.
It is appropriate for the Commission to liberalize its interpretation
of section 3(a)(3) in these circumstances. The Applicant's relationship
with El Paso is within the plain meaning of section 3(a)(3) and, as
explained above, the proposed exemption will not result in harm to utility
consumers. For these reasons, Fidelity should be granted an exemption from
regulation as a holding company under section 3(a)(3) of the Act. See Gaz
--- ---
Metropolitan, Inc. and Gaz Metropolitain and Company, Limited Partnership,
--------------------------------------------------------------------------
Holding Co. Act Release No. 26170 (Nov. 23, 1994) (exemption granted under
section 3(a)(5) of the Act where the literal terms of the statute were
satisfied, and it appeared that the exemption would not be detrimental to
consumers).
4. THE REQUEST FOR HEARING SHOULD BE DENIED.
The City of Las Cruces has requested a hearing, alleging that there
exist issues of material fact with respect to Fidelity's fiduciary duty,
the selection of the members of the Board of Directors of the reorganized
El Paso, the relationship between Fidelity and the new Board and the new
Chief Executive Officer of the reorganized El Paso, the likelihood that
Fidelity will reduce its El Paso holdings within a three year period, and
the timing and motivation of Fidelity's investments in El Paso. The City
fails to explain how a hearing on these issues are relevant to the matters
properly before the Commission. See City of Lafayette v. SEC, 454 F.2d
--- ------------------------
941, 953 (D.C. Cir. 1971), Northeast Utilities, Holding Co. Act Release No.
-------------------
25565 (June 29, 1992), and Eastern Utilities Associates, Holding Co. Act
----------------------------
Release No. 24641 (May 12, 1988) (hearing not required "in matters where
the ultimate decision will not be enhanced or assisted by the receipt of
evidence").
"It is well-settled that evidentiary hearings are required only when a
genuine issue of material fact exists." Wisconsin's Environmental Decade
--------------------------------
v. SEC, 882 F.2d 523, 526 (D.C. Cir. 1989). The issues raised by the City
------
are largely irrelevant to the question of whether Fidelity is entitled to
an exemption under section 3(a). Instead, they appear to go to whether
Fidelity should be deemed to be a holding company, an issue that has been
mooted by Fidelity's agreeing, for purposes of this application, to status
as a holding company. The sole remaining issue concerns Fidelity's ability
to dispose of the reorganized El Paso stock within the three-year period
requested under section 3(a)(4). As noted above, Fidelity believes that a
three-year period will enable the funds and accounts managed by it to
reduce their holdings in the reorganized El Paso in an orderly fashion,
consistent with market conditions and Fidelity's fiduciary obligations to
its investors. The City has failed to explain, with any specificity, why a
three-year period would be inadequate. See Connecticut Bankers Association
--- -------------------------------
v. Board of Governors, 627 F.2d 245, 2512 (D.C. Cir. 1980) (bald or
---------------------
conclusory allegations insufficient to require hearing). Further, the
exemption will expire by its terms at the end of those three years. It is
unclear, therefore, what is the basis for the City's concern.
CONCLUSION
For the reasons set forth above, Fidelity requests an exemption from
regulation as a holding company under the Act pursuant to section 3(a)(4),
or in the alternative, section 3(a)(3). A confirmation hearing for the
Fourth Amended Plan of Reorganization is scheduled for January 9, 1996. It
is a condition precedent to confirmation that Fidelity not be required to
register as a holding company under the Act, and that the reorganized El
Paso not be a subsidiary company of a registered holding company.
Accordingly, Fidelity requests expedited consideration of its application,
and asks the Commission to issue an order in this matter no later than
January 8, 1996.
Attachment
