Summary
The Public Utility Holding Company Act of 1935 (PUHCA), which is administered by the Securities and Exchange Commission (SEC), subjects public utility holding companies to federal regulation. Some recent events have raised concerns about SEC's administration of the act. GAO was asked to review SEC's administration of PUCHA. GAO's objectives included determining the nature and the extent to which SEC regulates registered holding companies and the results of its regulation, the extent to which SEC reviews claims of exemption and the results of these reviews, and how SEC determines whether companies have a controlling influence over public utilities or holding companies.
SEC regulates registered holding companies primarily by reviewing their applications for transactions and conducting periodic examinations that focus on improperly allocated costs and weak internal controls. As a result of these examinations, SEC has identified deficiencies at 20 companies since fiscal year 1999, which the agency estimates have resulted in consumer savings of over $450 million. However, holding companies identified some PUHCA forms and regulations that are outdated, which SEC staff plans to address as time and resources become available. Some parties have also observed that SEC's interpretations of parts of the act have allowed holding companies to have complex corporate structures and exposed them to financial risks, but SEC has said that it interprets the act to respond to the demands of a changing industry. In addition, several holding companies indicated that SEC processes applications slowly, but none identified any financial consequences caused by such delays. SEC improved its timeliness in processing some applications in fiscal year 2004. While PUHCA allows qualified holding companies to be exempt from registering under the act either by applying for an SEC order or filing an annual self-certification form, SEC has not reviewed the activities of all exempt holding companies to ensure that they continue to qualify for exemptions. However, in 2004 the staff reviewed the exemptions of all 81 holding companies that claim exemption by self-certification, which could lead to the revocation of some claimed exemptions. In addition, the staff did not evaluate the exemptions of holding companies that are exempt by SEC order as part of this review. SEC plans to take further steps to strengthen its oversight of exempt companies, including revising the self-certification form to collect more relevant information from exempt companies. SEC has not yet deemed an investor that owns less than 10 percent of the voting securities of a public utility or holding company to be a holding company, as defined in the act. SEC has typically granted no-action relief to these investors. In considering these requests, staff must determine whether these investment structures contain consent rights that would allow an investor to exercise such a controlling influence over the management and policies of its invested entities as to necessitate regulation as a holding company under PUHCA. Over the past two decades, SEC staff has issued no-action letters to investors that have acquired an expanding list of consent rights over public utilities or other holding companies.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change
from "In process" to "Implemented" or "Not implemented" based on our follow up work.
Director:
Team:
Phone:
Yvonne D. Jones
Government Accountability Office: Financial Markets and Community Investment
No phone on record
Recommendations for Executive Action
Recommendation: As long as SEC continues to have the responsibility to administer PUHCA, the Chairman, SEC, to improve the timeliness and quality of SEC's activities related to its oversight of registered holding companies, should implement the SEC Inspector General's recommendation for establishing time frames and target dates for assigning, reviewing, and issuing notices and orders on a case-by-case basis.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: As long as SEC continues to have the responsibility to administer PUHCA, the Chairman, SEC, to improve the timeliness and quality of SEC's activities related to its oversight of registered holding companies, should develop an action plan to establish and meet time frames for making improvements to existing PUHCA forms and developing a system to collect and analyze information contained in PUHCA filings to enhance SEC's ability to better monitor registered holding companies, while reducing the overall regulatory burden on these companies.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: Although SEC has recently conducted a review of all companies exempt by self-certification, the Chairman, SEC, should further enhance SEC's monitoring of exempt companies by expediting the evaluation of the different legal options and obtaining the necessary legal authority for requiring companies that are exempt by order to provide additional information on their operations.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: Although SEC has recently conducted a review of all companies exempt by self-certification, the Chairman, SEC, should further enhance SEC's monitoring of exempt companies by creating a formal strategy to conduct comprehensive reviews of companies claiming exemptions on a periodic basis and expand the focus of these reviews to include companies that claim exemption by order.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: In light of the growing number of consent rights that utility investors have acquired over operational matters of holding companies and public utilities, the Chairman, SEC, should develop and publish general guidelines that articulate minimum standards that an investor seeking to acquire an interest in a holding company or public utility must satisfy in order to receive a no-action letter. Examples of these minimum standards could include that a majority of the members of the public utility's or holding company's board of directors not be affiliated with the investor or that any consent rights be limited to those necessary to protect the investor from unilateral action by a majority investor.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: Finally, given the changes that are taking place in the utility industry and current debates about SEC's actions in administering PUHCA, including the agency's interpretations of the single area requirement and its interpretations of a controlling influence, the Chairman, SEC, should conduct a study on the impact of SEC's administration of PUHCA in the last decade and, if necessary, make legislative proposals. The study should examine whether its decisions and flexible interpretations facilitate consumer and investor protection and enable companies to provide energy to the nation's consumers in an efficient and competitive manner. In conducting this study, SEC should gather the views of the utility industry, consumer groups, trade associations, investment banks, rating agencies, economists, and relevant state and federal regulators.
Agency Affected: Securities and Exchange Commission
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
