Justice Van Devanter (left) and Chief Justice Charles Evans Hughes
(Courtesy Library of Congress )
Even as it faced the setback in Jones v. SEC, the SEC prepared for its most significant New Deal fight. Between 1928 and 1935, the Federal Trade Commission undertook what would become its most important and comprehensive early study of national holding companies and their inordinate influence on the securities markets. It published 84 volumes of hearings and testimony documenting the extraordinary concentration of power of the holding companies, often with inflated profits benefiting only the top stock holders to the detriment of minority shareholders.
After the stock market crash, fifty-three utility holding companies with $1.7 billion worth of outstanding securities went into receivership or bankruptcy. Twenty-three others with over a half-billion in securities defaulted on interest payments. By 1932, three super-holding companies -- J.P. Morgan’s United Corporation, Samuel Insull’s utility empire, and Electric Bond and Share -- controlled nearly half of the electricity generated in the United States.32
The revelations led Congress to pass the Public Utility Holding Company Act (PUHCA) on August 25, 1935. PUHCA gave the SEC unprecedented power to refashion the structure and business practices of the entire utility industry. It defined a holding company as any company which controlled ten percent of the voting stock of any public utility company, or any person exercising controlling interest in such a company. It required the SEC to simplify and eliminate uneconomical holding companies, including the power to eliminate such companies if it found the retention of utility properties not in the public interest of localized management, efficient operations, or effectiveness of regulation.33
Just seventeen days after passage of the act, utility industry officials announced their intention to challenge the constitutionality of PUHCA in court. The battle lines had been drawn. With the history of the conservative majority on the Supreme Court striking down regulations that were less extensive than PUHCA, the outcome was not at all certain. The SEC was caught off-guard by the widespread and coordinated industry opposition to the act. While fifty-seven smaller utilities registered, over a hundred companies brought lawsuits in thirteen different federal courts, seeking to enjoin the enforcement of the act.34
Realizing the fight was on, the SEC assembled a staff fit for the task, including U.S. Justice Department Special Assistants Benjamin Cohen and Thomas Corcoran, Treasury Department Assistant Attorney General Robert Jackson, and Solicitor General Stanley Reed. SEC Chairman Landis determined Electric Bond and Share Co., the nation’s second largest utility which operated in “interstate commerce” in thirty-one separate states, to be the test case. Yet, the Supreme Court posed the problem for the SEC. How could the SEC convince the Court that PUHCA, which involved far more invasive regulations that those the Court struck down in Jones v. SEC, was constitutional?
The SEC adopted a two-part strategy. First, it chose to delay the case in order to wait out the retirement of at least one of the “Four Horsemen” the SEC believed to be a sure vote against PUHCA. Second, the SEC decided to focus its legal argument on Sections 4 and 5, two of the less controversial provisions of the act, which prohibited a utility from engaging in interstate commerce until it had filed a registration statement with the SEC. The agency explicitly tried to avoid a decision on the most controversial death penalty section, which gave the SEC the power to require a holding company to reorganize or dissolve entirely where the continued existence of the holding company structure threatened the company’s geographical or economic integration.35 This strategy proved to be successful when, in January 1937, Judge Julian Mack of the New York District Court, a friend of the New Deal, ruled in favor of the SEC.36
The delay in the ruling proved fortuitous. In 1936, President Roosevelt was re-elected and in early 1937, announced his ill-fated Supreme Court “packing” scheme. Roosevelt was unaware that Justice Roberts, who had been an inconsistent member of numerous 5-4 decisions, had determined to move more solidly into the New Deal camp. Roberts came to believe that the continuing economic catastrophe demanded more aggressive government action, which in 1937 meant administrative regulatory action by agencies such as the SEC.37 When the Electric Bond and Share case finally came before the Supreme Court in 1938, Roosevelt had named two new Supreme Court justices, Hugo Black for retiring Justice Van Devanter, and former Solicitor General Stanley Reed for retiring Justice Sutherland. By then, the new majority did not even need newly-appointed Justice Reed’s vote to sustain the registration requirements of PUHCA. Only Justice McReynolds dissented.38
In Electric Bond and Share Co. v. SEC, the Supreme Court implicitly affirmed the overall constitutionality of the law. The SEC, under Chairman William O. Douglas, soon began the SEC’s aggressive enforcement efforts.39 By 1940, the debate about the SEC’s administrative power to enforce regulations affecting the securities industry seemed over.40
(32) Seligman, 127; Pritchard and Thompson, Securities Law and the New Deal Justices, 862-883.
(33) 49 Stat. 820 (1935).
(34) Seligman, 134.
(35) Loss, Securities Regulation, p. 161.
(36) Ibid., 136-7
(37) Barry Cushman, Rethinking the New Deal Court (Oxford University Press: New York, 1998).
(38) Electric Bond and Share Co. v. SEC, 303 US 419 (1938).
(39) Thompson and Pritchard, 872-892.
(40) See the decision in SEC v. US Realty & Improvement Co., 310 US 434 (1940), which affirmed the constitutionality of the SEC’s broad authority under the Chandler Act to regulate company bankruptcy reorganizations.
