In a March 19, 2009 order, the Federal Energy Regulatory Commission ("FERC" or "Commission") granted blanket authorizations under Federal Power Act ("FPA") Section 203 that permitted a financial institution to play a more active advocacy role in the management of public utilities, without exercising control over the public utilities. The March 19 order is a step in the evolution of FERC’s reliance on Securities and Exchange Commission ("SEC") regulation of financial institutions and their acquisition of voting securities without exercising control. FERC previously granted certain blanket authorizations to applicants that made Schedule 13G filings with the SEC. In last week’s order, FERC extended the availability of blanket authorizations to entities that make Schedule 13D filings, subject to certain conditions limiting the filing entities’ ability to exercise control.
Schedule 13G and 13D Filings
Schedule 13G filings are informational filings to be submitted by a person who acquires beneficial ownership of more than 5% of any class of voting equity securities of a company that is registered under section 12 of the Securities Exchange Act of 1934. If the person has acquired the securities in the ordinary course of business and not with the purpose or effect of influencing control over the issuer of the securities, the person may file an abbreviated statement on Schedule 13G. By contrast, submission of a 13D filing is indicative of intent to take a more activist role in the management of the affairs of the issuer. For Schedule 13D or 13G reporting purposes, each affiliated "Reporting Group" files independently with the SEC. In the application at issue in the order, each Reporting Group is comprised of mutual advisers, investment management subsidiaries and/or applicant funds and includes all of the separate investment management subsidiaries that are permitted to share information under the financial institution’s information barrier policy. Each Reporting Group is restricted from sharing information with other affiliated Reporting Groups.
Extending FERC Blanket Authorization to Cover Schedule 13D
FERC issued the March 19 order in response to a request submitted by Franklin Resources, Inc. and its investment management subsidiaries and applicant funds ("Franklin") for blanket authorizations under FPA Section 203. Franklin requested blanket authorizations for each of its Reporting Groups to acquire up to but less than 10% of a publicly traded utility where the Reporting Group files a Schedule 13D for such holdings. Franklin submitted its application because it sought to have each Reporting Group treated as a separate entity under section 203(a)(2). The Commission granted Franklin's request to rely on Schedule 13D filings and certain conditions to establish an inability to exercise control over the utility whose securities are acquired by one or more Franklin Reporting Groups. The Commission has relied on Schedule 13G filings to evaluate the ability to exercise control over a utility. The use of a Schedule 13D filing will allow Franklin the opportunity to assume a broader advocacy role with respect to major economic decisions concerning the nature of the utility and major corporate governance issues. Franklin agreed to limit its advocacy to the following activities: A) a spin-off, sale or purchase of an asset, or buy-back of shares; B) rejection of a "poison pill," change in management personnel, change of a staggered board, and C) sale of the company, purchase of a company or change in tax status. Moreover, Franklin assured the Commission that under the requested authorizations neither the Reporting Group nor any entity within the Reporting Group would engage in the following activities:
- (1) Seeking board representation or the power to name a board member;
- (2) Seeking to nominate or designate managerial, operational, or other personnel of the company in question;
- (3) Seeking to set or influence the price at which power, fuel or any other product is sold or purchased in the marketplace;
- (4) Seeking to determine or influence whether generation, transmission, distribution, or other physical assets are made available or withheld from the marketplace;
- (5) Seeking to determine or influence ratemaking or rates for the sale of power or the provision of transmission or distribution service;
- (6) Seeking to determine or influence wages to be paid to labor or participate in or influence labor negotiations; or
- (7) Seeking to influence any other operational decision of the company in question.
The Commission conditioned the blanket authorization on these limitations on control by the Reporting Groups and on Franklin’s maintenance of its informational barrier policies and procedures in accordance with applicable SEC guidelines. In contrast to these seven indicia of control, the Commission concluded that the three activities (A-C) Franklin described are the kind of rights the Commission has previously allowed investors to exercise in order to protect their investment, not to exert control over the utility. The Commission’s ruling acknowledges a distinction between the general input and advocacy role investors play in broad corporate decisions (activities in which Franklin will participate) and conduct that is indicative of control for purposes of section 203 (activities in which Franklin will not participate).
FERC Limited Each Franklin Reporting Group Making Schedule 13G Filings to 20% Interests in Public Utilities
Franklin also sought blanket authorizations under FPA Section 203(a)(2) for its investment management subsidiaries which make Schedule 13G filings to acquire an unlimited amount of voting securities of any utility. FERC denied Franklin’s request. The Commission, however, granted blanket authorization for each individual Reporting Group to acquire up to 20% of the voting securities of a public utility or its parent subject to the conditions FERC previously imposed with respect to Schedule 13D filing entities (Franklin Resources, Inc., 126 FERC ¶ 61,250 at P 21 (March 19, 2009). The Commission imposed a limitation of less than 10% on the ownership of voting securities of a publicly traded utility by any applicant fund or investment account within the Reporting Group.
This blanket authorization will permit Franklin to make future acquisitions subject to the Schedule 13D or 13G filing requirement, the enumerated limitations on control (where a Section 13D filing is used), the Reporting Group 20% limitation and 10% investment account/applicant fund limitation and certain reporting and other requirements specified in the order.
Click here for full order.