United States: FERC Approval For Interlocking Directors – New Actions For Utilities To Take By April 30, 2001

Utilities that have officers or directors with interlocks with commercial banks will have to change the information they include on this year’s FERC Form 561, which is due for filing on or before April 30, 2001. Also, many individuals who are subject to a FERC order that imposes an "underwriting ban" – the bank involved may not underwrite any securities of the utility involved – may have to provide a notice to FERC.

Section 305(b) of the Federal Power Act makes it unlawful – without FERC approval – for a person to hold the position of an officer or director of a electric public utility while also being a director or officer of certain other enterprises, including, in some cases, a person authorized by law to underwrite public utility securities.

Many utility officers and directors have received FERC approval for interlocking relationships with banks or investment banks over the years. In the 1980s and 1990s, as restrictions were eased on commercial banks’ engaging in underwriting activities, these relationships became jurisdictional in many cases, and approvals were obtained. In most cases, if the person involved was an "insider" – that is, an officer – of either the utility or the bank, FERC would condition its approval of the interlock by imposing the "underwriting ban." Under these approving orders, the bank and any of its affiliates were barred from underwriting any securities of the utility or any of its affiliates.

As reported in the November 1999 Jones Day Energy Bulletin, "New Law Eases FPA Interlocking Director Restrictions," the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act, significantly eased the requirements for FERC approval in the case of interlocks between utilities and commercial and investment banks.

With the passage of Gramm-Leach-Bliley, all interlocks between a commercial bank and a utility are jurisdictional and will require FERC approval unless the utility institutes one of the four statutorily provided safeguards against self dealing. These four safeguards, any one of which will obviate the need for FERC approval for an interlock with a commercial or investment bank, are as follows:

• the person does not participate in any deliberations or decisions of the public utility regarding the selection of an underwriting firm for the utility if that person is an officer or director of any underwriting firm being considered for an underwriting assignment; or
• the bank or underwriting firm of which the person is an officer or director does not participate in any underwriting for the utility with which that person holds an interlocking officer or director position; or
• the utility selects its underwriters by competitive procedures; or
• the issuance of securities by the public utility has been approved by all federal and state regulatory bodies having jurisdiction over the issuance.

The 1999 law makes the "underwriting ban" only one of four safeguards that may be instituted by the interlocked officer or director and the utility. What about those persons whose FERC order imposes the ban? Can they use one of the other alternatives from the statute instead?

FERC answered the last question in the affirmative in an order from September 2000. In James R. Lientz, Jr., 93 FERC ¶ 61,007(Oct. 2, 2000), FERC was asked to eliminate the "underwriting ban" as no longer being necessary to protect the public interest. The request was filed before the adoption of Gramm-Leach-Bliley. The commission did not issue its order in this case until after the new law, however.

In this case, FERC dismissed as moot the question of whether the underwriting ban should be lifted for Mr. Lientz. The commission noted that the new law provides four alternative methods of providing safeguards to prevent unfair treatment to a utility when dealing with an underwriter. One of the statute’s conditions is, of course, essentially the underwriting ban imposed by FERC in many orders. FERC notes in the case, however, that now an individual and the utility may select any of the four methods. If any of these methods are in place, no FERC approval of the interlock is required. FERC said that the underwriting ban was no longer mandatory.

These changes will affect how the FERC Form 561 is completed this year. Interlocks between a utility and a commercial bank must still be reported on the Form. However, now the interlock should be coded as "SECU." In most cases, an interlock with a bank would have been coded "FIN" in the past. Also, note that many persons who previously did not have to file this annual notice will have to do so now. A person who serves as officer or director of the utility and officer or director of virtually any bank – not just banks with underwriting affiliates – will have to file the Form 561 reporting the interlock. If one of the four safeguards is in place, however, none of these people will need FERC approval.

In the past, in each case where a "SECU" code was used for an interlock, FERC would expect to see a docket number listed on the Form 561 (item 4 on the front page) referencing the case approving that interlock. Assuming one of the four safeguards is in place and thus no approval is required, there will be no "docket number" in the future for this type of interlock. Companies may wish to note on the Form 561 that "no approval is required because of Section 305(b)(2)."

Finally, the FERC in its Lientz decision ordered all individuals who were subject to a FERC order imposing the underwriting ban to notify FERC if they believe they are no longer subject to FERC jurisdiction. The notice should specify that the person’s interlocking position is no longer subject to FERC jurisdiction because one of the four safeguards will be followed. This action will get the person "out of the system" of FERC approvals.

The notice by a person that he or she was no longer subject to an approval requirement was to be given within 30 days of the Lientz opinion (by November 2, 2000). If the notice has not been given, the FERC Form 561 filing requirement would be a good opportunity to attend to this housekeeping detail. We would recommend a separate letter giving the required notice accompany the Form 561 of each individual to whom the issue is relevant. This notice will explain why the interlock code has been changed on the Form.