1. The enactment of § 11(b)(1) of the Public Utility Holding
Company Act of 1935, authorizing the Securities and Exchange
Commission to require each public utility holding company engaged
in interstate commerce to limit its operations to a single
integrated public utility system, was within the power of Congress
under the commerce clause of the Constitution. Pp. 327 U. S.
(a) While the ownership of securities, considered separately and
abstractly, may not be commerce, the ownership of securities of
operating companies has a real and intimate relation to the
interstate activities of public utility holding companies and
Page 327 U. S. 687
effectively divorced therefrom; such ownership is the generating
force of the constant interstate flow of reports, letters,
equipment, securities, accounts, instructions and money which
constitute the life blood of holding companies and allow abuses to
be effectuated. P. 327 U. S.
(b) Congress may impose relevant conditions and requirements on
those who use the channels of interstate commerce in order that
those channels will not become the means of promoting or spreading
evil, whether of a physical, moral, or economic nature. P.
327 U. S.
(c) The fact that an evil may involve a corporation's financial
practices, its business structure, or its security portfolio does
not detract from the power of Congress under the commerce clause to
promulgate rules in order to destroy that evil -- once it is
established that the evil concerns or affects commerce in more
States than one. P. 327 U. S.
(d) Congress having found that economic evils resulting from
unintegrated public utility holding company systems were polluting
the channels of interstate commerce and took the form of
transactions occurring in and concerning more States than one, it
had power under the commerce clause to attempt to remove those
evils by ordering the holding companies to divest themselves of the
securities that made such evils possible. P. 327 U. S.
2. An order of the Securities and Exchange Commission requiring
a public utility holding company to divest itself of its scattered
subsidiaries and to confine its operations to a single integrated
public utility system, pursuant to § 11(b)(1) of the Public Utility
Holding Company Act of 1935, does not take property without just
compensation in violation of the due process clause of the Fifth
Amendment. Pp. 327 U. S.
(a) Congress having determined that the economic advantages of a
holding company at the top of an unintegrated public utility system
are not commensurate with the resulting economic disadvantages, the
fact that valuable interests may be affected does not, by itself,
render that determination invalid under the due process clause. P.
327 U. S.
(b) Since the Act does not contemplate or require the dumping or
forced liquidation of securities on the market for cash, but
requires any divestment or reorganization plan to be fair and
equitable and to be carefully scrutinized by both the Commission
and the enforcing court -- thus enabling the assertion and
protection of all shareholders' rights -- it cannot be said, in the
absence of any alleged unfair plan of divestment, that the
shareholders are adversely affected from a constitutional
standpoint by the operation of § 11(b)(1). P. 327 U. S.
Page 327 U. S. 688
3. Congress having decided, within the scope of its
constitutional power and discretion, that it is necessary to
reorganize existing public utility holding company systems, this
Court cannot question the appropriateness or propriety of its
decision, even though other sections of the Act provide for the
regulation of future transactions of the kinds that were found to
give birth to many of the evils about which Congress was concerned.
P. 327 U. S.
4. Even though a particular holding company may not have engaged
in any of the evils enumerated in § 1(b) of the Public Utility
Holding Company Act of 1935, this does not make the application of
§ 11(b)(1) to it unconstitutional, since the power of Congress to
legislate generally in order to prevent potential injury to the
national economy from becoming a reality is not limited by proof of
the existence of evils in each particular situation. P.
327 U. S.
5. In the light of the facts stated in the opinion, and
particularly petitioner's extensive holdings of the securities of
its subsidiaries and the penetration of local managements with men
selected by or historically related to petitioner, the Commission
was justified in treating petitioner not as engaged solely in the
business of acquiring and holding stocks and other securities of
its subsidiaries for investment, but as a "holding company"
possessing domination over its subsidiaries or the power to
dominate them when and if necessary, even though petitioner's
active intervention in the affairs of its subsidiaries has been of
a limited character and operational policies have been left
entirely to local management. Pp. 327 U. S.
6. Petitioner clearly is engaged in interstate commerce, since
it is the nucleus of an empire of corporations covering 17 States
and the District of Columbia, its influence and domination permeate
the entire system, the mails and instrumentalities of interstate
commerce are vital to the functioning of this system, and several
of its subsidiaries admittedly are engaged in interstate commerce.
P. 327 U. S.
7. The power of the Commission to deny exemption under § 3(a)(1)
to a predominantly local holding company does not mean that a
holding company having no relation whatever to interstate commerce
may be subjected to § 11(b)(1) or to any other provisions of the
Act. P. 327 U. S.
133 F.2d 148, affirmed.
After appropriate administrative proceedings under § 11(b)(1) of
the Public Utility Holding Company Act of 1935, the Securities and
Exchange Commission entered
Page 327 U. S. 689
orders limiting petitioner's properties to those which, in the
judgment of the Commission, complied wit the standards of that
section and requiring it to sever relationship with all of its
other properties. 11 S.E.C.194; 11 S.E.C. 715. On petition for
review, the Circuit Court of Appeals sustained the Commission's
order. 133 F.2d 148. This Court granted certiorari. 318 U.S. 750.
320 U.S. 708. Affirmed,
p. 327 U. S. 711
MR. JUSTICE MURPHY delivered the opinion of the Court.
Congress enacted the Public Utility Holding Company Act of 1935,
49 Stat. 803, in order to correct grave abuses which it had found
in the use of the holding company device in the nation's electric
and gas utility industries. This Court, in Electric Bond &
Share Co. v. Securities and Exchange Commission, 303 U.
, held constitutional the various provisions of
the Act relating to the registration of holding companies as
therein defined. In this case, we are called upon to determine the
constitutionality of § 11(b)(1) of the Act, authorizing the
Securities and Exchange Commission to act to bring about the
geographic and economic integration of holding company systems.
Specifically, we must decide whether this requirement falls within
the power of Congress to regulate commerce among
Page 327 U. S. 690
the several states and whether it violates the due process
clause of the Fifth Amendment.
The North American Company, the petitioner, is a holding company
within the meaning of the Act, § 2(a)(7), and is registered as such
with the Securities and Exchange Commission. [Footnote 1
] The Commission instituted appropriate
administrative proceedings against North American under § 11(b)(1),
the provisions of which apply to registered holding companies. As a
result, the Commission entered orders limiting North American's
properties to those which, in the Commission's judgment, complied
with the standards of § 11(b)(1), and compelling it to sever
relationships with all its other properties. [Footnote 2
] The court below, after affirming the
orders of the Commission on a statutory level, rejected North
American's constitutional objections. 133 F.2d 148. Only these
constitutional issues are now before us.
As was the situation in the Electric Bond & Share
case, North American is clearly engaged in activities
which bring it within the ambit of congressional authority. North
American is a typical utility holding company. It is the pinnacle
of a great pyramid of corporations, the majority of which operate
electric and gas utility properties. These properties are scattered
throughout the United States, many of them serving large cities and
contiguous territories. [Footnote
] Electric energy is transmitted across state lines by
numerous companies in the pyramid or
Page 327 U. S. 691
system. [Footnote 4
] As of
December 31, 1940, there were some eighty corporations in the
system, with an aggregate capitalized value in excess of
$2,300,000,000. Organized in New Jersey in 1890 and maintaining
business headquarters in New York City, North American maintains
direct or indirect interests in these corporations through the
medium of stock ownership. It is that medium that binds the system
North American owns stock directly in ten of the corporations,
holding 79% or more of the common stock of eight of them and 17.71%
and 19.2%, respectively, of the voting securities of the other two.
Three of these direct subsidiaries are registered holding
companies: (1) Union Electric Company of Missouri, operating in and
around St. Louis Mo. and with subsidiaries operating in Illinois
and Iowa as well; (2) Washington Railway and Electric Company, with
subsidiaries operating in the District of Columbia and adjacent
territory in Virginia and Maryland, and (3) North American Light
& Power Company, operating extensive systems in Kansas,
Missouri, Illinois and Iowa in addition to being the parent of
several registered holding companies.
Four of the direct subsidiaries of North American are operating
companies: (1) Cleveland Electric Illuminating Company, serving
Cleveland, Ohio, and surrounding territory; (2) Pacific Gas &
Electric Company, serving large areas in California; (3) The
Detroit Edison Company, serving Detroit and vicinity, and (4)
Wisconsin Electric Power Company, a holding company with
subsidiaries operating an integrated electric utility system in
Wisconsin and Michigan.
Page 327 U. S. 692
The other three direct subsidiaries are (1) North American
Utility Securities Corporation, an investment trust; (2) West
Kentucky Coal Company, which owns and operates a coal mine in
Kentucky and sells coal in interstate commerce, and (3) 60 Broadway
Building Corporation, which owns the office building in New York
City where petitioner has its offices.
The various companies in the North American system perform a
variety of functions, from electric and gas service to railroad
transportation, warehousing, and amusement park operations. All
told, they conduct business in seventeen states and the District of
Columbia. Electric service alone is provided for more than
3,000,000 customers in an area of roughly 165,000 square miles.
North American claims that its sole and continuous business has
been that of acquiring and holding for investment purposes stocks
and other securities of the subsidiaries, its relationship being
essentially that of "a large investor seeking to promote the sound
development of his investment." Active intervention on North
American's part in the activities of these companies, it is true,
has been of a limited character. Operations and operational
policies, the Commission found, have been left entirely to the
local managements. Nor has North American sold these subsidiaries
any supplies or engineering service. This lack of active
intervention, however, is indecisive. It appears to have resulted
in large part from North American's satisfaction with the local
managements of the subsidiaries and from the fact that the local
managements have often included men selected by or historically
related to North American. See Detroit Edison Co. v. Securities
and Exchange Commission,
119 F.2d 730, 734, 735; Pacific
Gas & Electric Co. v. Securities and Exchange Commission,
127 F.2d 378, 383, 384. The Commission was thus warranted in
considering the harmonization of local policies with those of North
American as a fact, the
Page 327 U. S. 693
absence of conflicts making affirmative action by North American
unnecessary. But it does not follow that North American's
domination of its system was any less real or effective. Historical
ties and associations, combined with strategic holdings of stock,
can on occasion serve as a potent substitute for the more obvious
modes of control. See Southern Pacific Co. v. Bogert,
250 U. S. 483
250 U. S.
-492; Natural Gas Co. v. Slattery,
302 U. S. 300
302 U. S.
-308. Domination may spring as readily from subtle or
unexercised power as from arbitrary imposition of command. To
conclude otherwise is to ignore the realities of intercorporate
relationships. Rochester Telephone Corp. v. United States,
307 U. S. 125
307 U. S.
-146. In light of the extensiveness of North
American's holdings of the securities of its subsidiaries and the
penetration of local managements with men of North American
background, the Commission was justified in treating North American
as possessing domination over its subsidiaries or the power to
dominate them when and if necessary. [Footnote 5
But North American, in some respects, has actually intervened in
the activities of its subsidiaries. It has affirmatively
participated in and dominated their financing operations. [Footnote 6
] So completely has it taken
over the planning and handling of the various flotations of
securities that North American urged before the Commission, though
in vain, that the subsidiaries were incompetent to handle
Page 327 U. S. 694
such matters, and that it would be highly uneconomical for them
to attempt to do so. As the Commission noted, the ability to
dominate this financing and to control the flow, through
underwriting channels, of millions of dollars of securities has
been of great value and benefit to North American, in addition to
being of aid to the subsidiaries. North American has also provided
the subsidiaries with advisory and consultative facilities in
relation to management problems, and inter-company committees have
been created to serve as clearing houses for technical and
The interstate character of North American and its subsidiaries
is readily apparent from the Commission's survey of their
activities. North American is more than a mere investor in its
subsidiaries. See Northern Securities Co. v. United
States, 193 U. S. 197
193 U. S.
-354. It is the nucleus of a far-flung empire of
corporations extending from New York to California and covering
seventeen states and the District of Columbia. Its influence and
domination permeate the entire system and frequently evidence
themselves in affirmative ways. The mails and the instrumentalities
of interstate commerce are vital to the functioning of this system.
They have more than a casual or incidental relationship. Cf.
Ware & Leland v. Mobile County, 209 U.
; Blumenstock Bros. v. Curtis Pub. Co.,
252 U. S. 436
Federal Base Ball Club v. National League, 259 U.
. Without them, North American would be unable to
float the various security issues of its own or of its
subsidiaries, thereby selling securities to residents of every
state in the nation. Without them, North American would be unable
to exercise and maintain the influence arising from its large stock
holdings, receiving notices and reports, sending proxies to
stockholders' meetings, collecting dividends and interest, and
transmitting whatever instructions and advice may be necessary. Nor
could North American maintain its
Page 327 U. S. 695
other relationships and contacts with its own subsidiaries
without the use of the mails and facilities of interstate commerce.
Such interstate commercial transactions involve the very essence of
North American's business. See International Textbook Co. v.
Pigg, 217 U. S. 91
enable it "to promote the sound development" of its investments
from its headquarters in New York City. In short, they are commerce
which concerns more states than one. Gibbons v.
9 Wheat. 1, 22 U. S. 194
Second Employers' Liability Cases, 223 U. S.
, 223 U. S. 46
Minnesota Rate Cases, 230 U. S. 352
230 U. S. 398
As stated by this Court in Associated Press v. Labor
Board, 301 U. S. 103
301 U. S.
"Interstate communication of a business nature, whatever the
means of such communication, is interstate commerce regulable by
Congress under the Constitution."
Moreover, North American concedes that four of its direct
utility subsidiaries, Union Electric Company of Missouri,
Washington Railway and Electric Company, North American Light &
Power Company and Wisconsin Electric Power Company, transmit energy
across state lines and hence are engaged in interstate commerce. It
further concedes that its subsidiary West Kentucky Coal Company is
engaged in interstate commerce, although contending that the
remaining five direct subsidiaries are not so engaged. In view of
North American's very substantial stock interest and its domination
as to the affairs of its subsidiaries, as well as its latent power
to exercise even more affirmative influence, it cannot hide behind
the facade of a mere investor. Their acts are its acts in the sense
that what is interstate as to them is interstate as to North
American. These subsidiaries thus accentuate and add materially to
the interstate character of North American. Electric Bond &
Share Co. v. Securities and Exchange Commission, supra,
303 U. S. 440
They make even more inescapable the conclusion that North American
bears not only a "highly important relation to interstate
Page 327 U. S. 696
and the national economy," id.,
p. 303 U. S. 441
but is actually engaged in interstate commerce. It is thus subject
to appropriate regulatory measures adopted by Congress under its
Turning to § 11(b)(1) [Footnote
] and its constitutional impact upon North American, we find
that it directs the Commission to apply its provisions to holding
companies engaged in interstate commerce. In essence, it confines
the operations of each holding company system to a single
Page 327 U. S. 697
public utility system with provision for the retention of
additional systems only if they are relatively small, located close
to the single system, and unable to operate economically system to
a single integrated public without the loss of substantial
economics; in addition, other holdings may be retained only if
their retention is related to the operations of the retained
These requirements of § 11(b)(1) apply only to registered
holding companies. A holding company, by statutory definition, is a
company that controls or possesses a controlling influence over an
electric or gas utility company. § 2(a)(7). A holding of 10% or
more of the outstanding voting securities of such a utility company
is presumed to be sufficient to constitute such a relationship, but
this presumption may be rebutted by proof before the Commission of
a lack of control or controlling influence. Accordingly, a company
that is a mere investor in utility securities and that does not
control or possess a controlling influence over the utility
companies need not comply with § 11(b)(1).
A holding company as so defined must register, and hence must
obey the commands of § 11(b)(1) if it uses the mails or the
instrumentalities of interstate commerce directly or through its
subsidiaries in the operation of its business. [Footnote 8
] Thus, a holding company may sell,
transport, or distribute gas or electric energy in interstate
commerce. § 4(a)(1). It may use the mails or interstate commerce to
negotiate or perform service, sales or construction contracts
Page 327 U. S. 698
with other companies in the system. § 4(a)(2). It may use the
mails or interstate commerce to distribute or make offerings for
the sale or exchange of securities of its own or of other system
companies. § 4(a)(3). It may use the mails or interstate commerce
to acquire securities or utility assets of other companies. §
4(a)(4). It may engage in a business in interstate commerce. §
4(a)(5). Or it may own or control securities of subsidiaries that
do any of the foregoing acts. § 4(a)(6). Moreover, § 2(a)(28)
defines "interstate commerce," as used in these and other
provisions of the Act, to mean "trade, commerce, transportation,
transmission, or communication among the several States or between
any State and any place outside thereof."
By making these enumerated interstate transactions unlawful
unless the holding company registers with the Commission, and by
extending § 11(b)(1) to registered holding companies, Congress has
effectively applied § 11(b)(1) to those holding companies that are
in fact in the stream of interstate activity and that affect
commerce in more states than one. Congress has further declared in
§ 1(c) that all the provisions of the Act, thus including §
11(b)(1), shall be interpreted to meet the problems and remove the
evils connected with public utility holding companies "which are
engaged in interstate commerce or in activities which directly
affect or burden interstate commerce." Section 11(b)(1) is thus
clearly and unmistakably applicable to holding companies engaged in
Not all holding companies that are engaged in interstate
activities, however, must necessarily comply with § 11(b)(1). By
the terms of § 3(a)(1), if a holding company and all of its
subsidiaries are predominantly intrastate in character and carry on
their business substantially in a single state in which such
holding company and every subsidiary thereof are organized, the
Page 327 U. S. 699
may grant an exemption from any provision of the Act "unless and
except insofar as it finds the exemption detrimental to the public
interest or the interest of investors or consumers."
The power of the Commission under the "unless and except" clause
of § 3(a) to deny an exemption to a predominantly local holding
company does not mean, as North American urges, that a holding
company having no relation whatever to interstate commerce be
subjected to § 11(b)(1), or to any other provision of the Act. The
Commission, in denying an exemption under this clause, is bound by
the policy set forth in § 1(c) to act so as to eliminate evils
connected with holding companies "engaged in interstate commerce or
in activities which directly affect or burden interstate commerce."
A holding company predominantly local in character may nevertheless
engage in activities affecting or burdening interstate commerce to
the detriment of the public interest or the interests of investors
and consumers. Only in such a case could the Commission properly
deny an exemption under the "unless and except" clause. [Footnote 9
] This problem however, is
academic so far as North American is concerned. Like most public
utility holding companies, North American is engaged in interstate
commerce directly and through its subsidiaries. It can lay no claim
to a predominantly intrastate character; as to it, § 3(a)(1) is
wholly inapplicable. The possibility that the Commission might
erroneously fail to exempt some truly local holding company from
the provisions of § 11(b)(1) cannot negative the plain fact that §
Page 327 U. S. 700
was designed to apply and does apply to holding companies
engaged in interstate commerce. North American is therefore subject
to its terms.
The crucial constitutional issue, so far as the commerce clause
is concerned, resolves itself into the query whether Congress may
validly require holding companies engaged in interstate commerce to
dispose of their security holdings and to confine their activities
in accordance with the standards of § 11(b)(1). In urging the
negative answer to this query, North American relies upon the
settled doctrine that the federal commerce power extends to
intrastate activities only where those activities
"so affect interstate commerce, or the exertion of the power of
Congress over it, as to make regulation of them appropriate means
to the attainment of a legitimate end, the effective execution of
the granted power to regulate interstate commerce."
United States v. Wrightwood Dairy Co., 315 U.
, 315 U. S. 119
See also Santa Cruz Fruit Packing Co. v. Labor Board,
303 U. S. 453
303 U. S. 466
United States v. Darby, 312 U. S. 100
312 U. S.
-123; Wickard v. Filburn, 317 U.
, 317 U. S.
-124. It is said that the ownership by North American
of securities of other system companies is not, in itself,
commerce, interstate or intrastate, and that the right to own or
retain property is characteristically governed by state laws, the
federal government having no concern with such matters except as an
incident to the due exercise of one of its granted powers. North
American denies that the necessary relationship between the
ownership of securities and interstate commerce it self-evident, or
that it has been found as a fact by Congress, the Commission or any
court. The absence of this relationship, it is concluded, causes §
11(b)(1) to fall.
This argument, however, misconceives not only the power of
Congress over interstate commerce, but also the basic nature of
public utility holding companies and the effect that stock
ownership has upon their activities.
Page 327 U. S. 701
The dominant characteristic of a holding company is the
ownership of securities by which it is possible to control or
substantially to influence the policies and management of one or
more operating companies in a particular field of enterprise.
] To be sure,
other devices may be utilized to effectuate control, such as voting
trusts, interlocking directors and officers, the control of
proxies, management contracts, and the like. But the concentrated
ownership of voting securities is the prime method of achieving
control, constituting a more fundamental part of holding companies
than of other types of business. Public utility holding companies
are thereby able to build their gas and electric utility systems,
often gerrymandered in such ways as to bear no relation to economy
of operation or to effective regulation. The control arising from
this ownership of securities also allows such holding companies to
exact unreasonable fees, commissions, and other charges from their
subsidiaries, to make undue profits from the handling of the issue,
sale, and exchange of securities for their subsidiaries, to issue
unsound securities of their own based upon the inflated value of
the subsidiaries, and to affect adversely the accounting practices
and the rate and dividend policies of the subsidiaries.
§ 1(b). [Footnote
Page 327 U. S. 702
Congress has found that all of these various abuses and evils
occur and are spread and perpetuated through the mails and the
channels of interstate commerce. And Congress has further found
that such interstate activities, which grow out of the ownership of
securities of operating companies, have caused public utility
holding companies to be "affected with a national public interest."
§ 1(a). [Footnote 12
The ownership of securities of operating companies, then, has a
real and intimate relation to the interstate activities of holding
companies and cannot be effectively divorced therefrom. That
ownership is the generating force of the constant interstate flow
of reports, letters, equipment, securities, accounts, instructions
and money -- all of which constitute the life blood of holding
companies and allow the numerous abuses to be effectuated. It also
makes the interstate transmission of gas and electricity by the
subsidiaries, as well as their other interstate actions, reflect
upon and magnify the interstate character of the holding companies.
Without the factor of stock ownership the very foundation and
framework of holding company systems would be gone and the amount
of their interstate activity would be at a minimum; centralized
management and control of widely scattered utility properties would
be difficult if not impossible.
We may assume without deciding that the ownership of securities,
considered separately and abstractly, is not
Page 327 U. S. 703
commerce. But when it is considered in the context of public
utility holding companies and their subsidiaries, its relationship
to interstate commerce is so clear and definite as to make any
other conclusion unreasonable. And Congress has plainly recognized
that relationship in its declarations of policy in § 1(a), in its
enumeration of abuses in § 1(b) and in its description of
interstate activities of holding companies in § 4(a). Such
statements would be utterly meaningless in the light of reality
were they not premised upon the ownership of securities by holding
companies and the use of that ownership to burden and affect the
channels of interstate commerce.
Section 11(b)(1) is concerned with, and operates directly upon,
this ownership of securities. In § 1(b)(4), Congress specifically
found that the national public interest, the interest of utility
investors and the interest of utility consumers are or may be
"when the growth and extension of holding companies bears no
relation to economy of management and operation or the integration
and coordination of related operating properties. [Footnote 13
The "growth and extension of holding companies"
Page 327 U. S. 704
obviously rest upon their security holdings. Congress expressed
in § 1(c) its determination
"to compel the simplification of public utility holding company
systems and the elimination therefrom of properties detrimental to
the proper functioning of such systems,"
thus eliminating the evil complained of in § 1(b)(4) and
ameliorating the conditions specified in the other subsections of §
1(b). It accordingly adopted § 11(b)(1), whereby holding companies
are compelled to integrate and coordinate their systems and to
divest themselves of security holdings of geographically and
economically unrelated properties. In this way, Congress hoped to
rejuvenate local utility management and to restore effective state
regulation, both of which had been seriously impaired by the
existence and practices of nationwide holding company systems.
The constitutionality of § 11(b)(1) under the commerce clause
thus becomes apparent. For nearly one hundred and twenty-five
years, this Court has recognized that the power of Congress over
interstate commerce is
"the power to regulate; that is, to prescribe the rule by which
commerce is to be governed. This power, like all others vested in
Congress, is complete in itself, may be exercised to its utmost
extent, and acknowledges no limitations other than are prescribed
in the constitution."
Gibbons v. Ogden, supra, 22 U. S. 196
This is not to say, of course, that Congress is an absolute
sovereign. It is limited by
Page 327 U. S. 705
express provisions in other parts of the Constitution, such as
Section 9 of Article I and the Bill of Rights. But, so far as the
commerce clause alone is concerned, Congress has plenary power, a
"extends to every part of interstate commerce, and to every
instrumentality or agency by which it is carried on, and the full
control by Congress of the subjects committed to its regulation is
not to be denied or thwarted by the commingling of interstate and
Minnesota Rate Cases, supra, 230 U. S.
This broad commerce clause does not operate so as to render the
nation powerless to defend itself against economic forces that
Congress decrees inimical or destructive of the national economy.
Rather, it is an affirmative power commensurate with the national
needs. It is unrestricted by contrary state laws or private
contracts. And, in using this great power, Congress is not bound by
technical legal conceptions. Commerce itself is an intensely
practical matter. Swift & Co. v. United States,
196 U. S. 375
196 U. S. 398
To deal with it effectively, Congress must be able to act in terms
of economic and financial realities. The commerce clause gives it
authority so to act.
We need not attempt here to draw the outer limits of this
plenary power. It is sufficient to reiterate the well settled
principle that Congress may impose relevant conditions and
requirements on those who use the channels of interstate commerce
in order that those channels will not become the means of promoting
or spreading evil, whether of a physical, moral or economic nature.
Brooks v. United States, 267 U. S. 432
267 U. S.
-437. This power permits Congress to attack an evil
directly at its source, provided that the evil bears a substantial
relationship to interstate commerce. Congress thus has power to
make direct assault upon such economic evils as those relating to
labor relations, Labor Board v. Jones &
Page 327 U. S. 706
Corp., 301 U. S. 1
Polish Nat. Alliance v. Labor Board, 322 U.
; to wages and hours, United States v. Darby,
to market transactions, Stafford v. Wallace,
258 U. S. 495
Chicago Board of Trade v. Olsen, 262 U. S.
, and to monopolistic practices, Northern
Securities Co. v. United States, supra.
The fact that an evil
may involve a corporation's financial practices, its business
structure, or its security portfolio does not detract from the
power of Congress under the commerce clause to promulgate rules in
order to destroy that evil. Once it is established that the evil
concerns or affects commerce in more states that one, Congress may
"The framers of the constitution never intended that the
legislative power of the nation should find itself incapable of
disposing of a subject matter specifically committed to its
In re Rahrer, 140 U. S. 545
140 U. S.
Congress, in § 11(b)(1) of the Public Utility Holding Company
Act, was concerned with the economic evils resulting from
uncoordinated and unintegrated public utility holding company
systems. These evils were found to be polluting the channels of
interstate commerce, and to take the form of transactions occurring
in and concerning more states than one. Congress also found that
the national welfare was thereby harmed, as well as the interests
of investors and consumers. These evils, moreover, were traceable
in large part of the nature and extent of the securities owned by
the holding companies. Congress therefore had power under the
commerce clause to attempt to remove those evils by ordering the
holding companies to divest themselves of the securities that made
such evils possible.
It follows that North American's contention that the ownership
of securities is not, in itself, interstate commerce, and hence may
not be made the basis of federal legislation misconceives the issue
in this case. Precisely the same
Page 327 U. S. 707
misconception was made more than forty years ago by the
appellants in Northern Securities Co. v. United States,
supra, 193 U. S.
-335, and was rejected by this Court. Inasmuch as
Congress may protect the freedom of interstate commerce by any
means that are appropriate and that are lawful and not prohibited
by the Constitution, this Court in the Northern Securities
case recognized that Congress may deal with and affect the
ownership of securities in order to protect the freedom of
commerce. Congress likewise has the power in this case.
In fashioning the remedy decreed by § 11(b)(1), Congress was
following a pattern set many years ago by decisions applying the
Sherman Antitrust Act, Northern Securities Co. v. United
States, supra; Standard Oil Co. v. United States, 221 U. S.
; Continental Ins. Co. v. United States,
259 U. S. 156
the commodities clause of the Hepburn Act; United States v.
Lehigh Valley R. Co., 220 U. S. 257
United States v. Delaware, L. & W. R. Co.,
238 U. S. 516
so affecting the corporate structure of holding companies, it was
exercising its power
"to foster, protect and control the commerce with appropriate
regard to the welfare of those who are immediately concerned, as
well as the public at large, and to promote its growth and insure
Dayton-Goose Creek R. Co. v. United States,
263 U. S. 456
263 U. S. 478
It is clear, therefore, that § 11(b)(1) is invulnerable to attack
under the commerce clause.
The constitutionality of § 11(b)(1) is also questioned from the
standpoint of the due process clause of the Fifth Amendment. North
American argues that this section, by compelling it to divest
itself of its scattered subsidiaries and to confine its operations
to a single integrated system, involves a taking of property
without just compensation. It is also claimed that such evils as
were found to exist in public utility holding companies find an
Page 327 U. S. 708
in other sections of the Act and that § 11(b)(1) is therefore
inappropriate. Neither contention is meritorious. [Footnote 15
The taking of property is said to involve "a vast destruction of
values." Reference is made in this respect to the valuable right of
North American's shareholders to pool their investments, and
thereby obtain the benefit alleged to flow from efficient, common
management of diversified interests. But Congress balanced the
various considerations and concluded that this right is clearly
outweighed by the actual and potential damage to the public, the
investors, and the consumers resulting from the use made of pooled
investment. Under such circumstances, whatever value this right may
have does not foreclose the protection of the various interests
which Congress found to be paramount. See Northern Securities
Co. v. United States, supra.
Nor does the value of North
American's contributions as a holding company to the earning power
and intrinsic value of the assets divested pursuant to § 11(b)(1)
bar Congress from requiring such divestment. Congress has concluded
from the extensive studies made prior to the passage of the Act
that the economic advantages of a holding company at the top of an
unintegrated, sprawling system are not commensurate with the
resulting economic disadvantages. The reasonableness of that
conclusion is one for Congress to determine. The fact that valuable
interests may be affected does not, by itself, render invalid under
the due process clause the determination made by Congress.
Page 327 U. S. 709
Moreover, there is no basis here for assuming that, in limiting
the scope of North American's operations, there will be
dispositions of securities for inadequate considerations, thereby
raising a question as to whether there is a destruction of these
values without just compensation. The Act does not contemplate or
require the dumping or forced liquidation of securities on the
market for cash. [Footnote
] Under §§ 11(d) and 11(e) of the Act, any divestment or
reorganization plan must meet the standards of fairness and
equitableness. In many instances, this may involve no more than a
distribution of the securities among the existing shareholders of
the holding company. [Footnote
] But, should securities be sold for cash, speculation as to
unfavorable market conditions cannot undermine the validity of §
11(b)(1). Any plan of divestment or reorganization, moreover, must
be carefully scrutinized by both the Commission and the enforcing
court, thus enabling the assertion and protection of all
shareholders' rights. See Otis & Co. v. Securities and
Exchange Commission, 323 U. S. 624
there are provisions in the
Page 327 U. S. 710
Act guarding against unduly rapid divestment or liquidation.
] In the light
of such statutory and judicial safeguards and in the absence of any
alleged unfair plan of divestment, we cannot say that North
American's shareholders are adversely affected, from a
constitutional standpoint, by the operation of § 11(b)(1). North
American's reliance on such cases as Louisville Joint Stock
Land Bank v. Radford, 295 U. S. 555
It is true, as North American points out, that other sections of
the Act provide for the regulation of many activities of holding
companies and their subsidiaries, activities that were found to
give birth to many of the evils about which Congress was concerned.
But such sections regulate future transactions, whereas § 11(b)(1)
is concerned with the existing structures of holding company
systems. These structures, in and of themselves, have been found by
Congress to constitute an evil that cannot be met by simply
regulating future transactions. Congress, in the exercise of its
discretion, has decided that it is necessary to reorganize the
holding company structures. And inasmuch as it has the
constitutional power to do so, we cannot question the
appropriateness or propriety of its decision. Sunshine
Anthracite Coal Co. v. Adkins, 310 U.
, 310 U. S.
Finally, North American claims that it has engaged in none of
the evils enumerated in § 1(b), and that it should be allowed to
prove that fact. The contention apparently is that § 11(b)(1), as
applied to North American, is unconstitutional, since none of the
evils that led Congress to enact the statute is present in this
instance. But if evils disclosed themselves which entitled Congress
Page 327 U. S. 711
as it did, Congress had power to legislate generally, unlimited
by proof of the existence of the evils in each particular
situation. Section 11(b)(1) is not designed to punish past
offenders, but to remove what Congress considered to be potential,
if not actual, sources of evil. And nothing in the Constitution
prevents Congress from acting in time to prevent potential injury
to the national economy from becoming a reality.
The judgment of the court below is accordingly
MR. JUSTICE REED, MR. JUSTICE DOUGLAS, and MR. JUSTICE JACKSON
took no part in the consideration or decision of this case.
North American registered with the Commission on February 25,
1937, reserving its right to challenge the constitutionality of §
11(b)(1) and other portions of the Act. See Landis v. North
American Co., 299 U. S. 248
299 U. S.
-252; Electric Bond & Share Co. v. Securities
and Exchange Commission, 303 U. S. 419
303 U. S.
Holding Company Act Releases Nos. 3405 and 3629.
Federal Trade Commission Report to the Senate, "Utility
Corporations," Sen.Doc. 92, Part 72-A, 70th Cong., 1st Sess., pp.
In 1929 and 1930, companies in the North American system
transmitted 9.3% and 7.7%, respectively, of the total amount of
electric energy transmitted across state boundaries in the United
States. Federal Trade Commission Report, supra, note 3
p. 43, Table 13.
As to only two of the subsidiaries, the Detroit Edison Company
and the Pacific Gas & Electric Company, has a claim been raised
that they were not controlled by or subject to a controlling
influence of North American. The Commission rejected both claims
after hearings and its determinations were sustained upon appeal.
Detroit Edison Co. v. Securities & Exchange
119 F.2d 730, cert. denied,
314 U.S. 618;
Pacific Gas & Electric Co. v. Securities and Exchange
127 F.2d 378, aff'd on rehearing by equally
139 F.2d 298, aff'd by equally divided
324 U.S. 826.
Federal Trade Commission Report, supra,
"Sec. 11(a) . . ."
"* * * *"
"(b) It shall be the duty of the Commission, as soon as
practicable after January 1, 1938:"
"(1) To require by order, after notice and opportunity for
hearing, that each registered holding company, and each subsidiary
company thereof, shall take such action as the Commission shall
find necessary to limit the operations of the holding company
system of which such company is a part to a single integrated
public utility system, and to such other businesses as are
reasonably incidental, or economically necessary or appropriate to
the operations of such integrated public utility system:
That the Commission shall permit a
registered holding company to continue to control one or more
additional integrated public utility systems, if, after notice and
opportunity for hearing, it finds that --"
" (A) Each of such additional systems cannot be operated as an
independent system without the loss of substantial economics which
can be secured by the retention of control by such holding company
of such system;"
" (B) All of such additional systems are located in one State,
or in adjoining States, or in a contiguous foreign country;
" (C) The continued combination of such systems under the
control of such holding company is not so large (considering the
state of the art and the area or region affected) as to impair the
advantages of localized management, efficient operation, or the
effectiveness of regulation."
"The Commission may permit as reasonably incidental, or
economically necessary or appropriate to the operations of one or
more integrated public utility systems the retention of an interest
in any business (other than the business of a public utility
company as such) which the Commission shall find necessary or
appropriate in the public interest or for the protection of
investors or consumers and not detrimental to the proper
functioning of such system or systems."
Section 4(b) compels holding companies to register if they have
outstanding any security which has been distributed by the use of
the mails or commerce, or offered for sale by like means,
subsequent to January 1, 1925, and if that security is held on
October 1, 1935, by any person not a resident of the state in which
the holding company is organized. We need not here consider the
force of this section, however, since North American and other
interstate holding companies are forced to register by reason of
the provisions of § 4(a).
The Commission has recognized the fact that the declaration of
policy in § 1(c) must be considered in granting or denying
exemptions under § 3(a) to predominantly intrastate holding
companies. See In re Niagara Hudson Power Corporation,
Holding Company Act Release No. 5115; In re Long Island
Holding Company Act Release No. 5746.
Bonbright and Means, The Holding Company (1932), p. 10; Jones
and Bigham, Principles of Public Utilities (1931), p. 589; Hearings
before House Committee on Interstate and Foreign Commerce, 74th
Cong., 1st Sess., on H.R. 5423, Part 1, pp. 76-77.
The congressional findings as to abuses listed in § 1(b), were
based upon some of the most exhaustive and comprehensive studies
ever to underlie a federal statute. Congress specifically referred
in § 1(b) to the studies made by the Federal Trade Commission
pursuant to S.Res. 83, 70th Cong., 1st Sess., the reports of the
House Committee on Interstate and Foreign Commerce made pursuant to
H.Res. 59, 72nd Cong., 1st Sess., and H.J.Res. 572, 72nd Cong., 2d
Sess. A summary of the manifold and complex abuses revealed by
these studies is contained in the Federal Trade Commission Report,
supra, note 3
Barnes, The Economics of Public Utility Regulation
(1942), p. 71.
The fact that § 1(a) refers to certain activities of holding
companies as "often" occurring in or affecting interstate commerce
and that § 1(b) refers activities of holding companies as and evils
occur is but an instance of careful draftsmanship. Contrary to
North American's contentions, the use of the words "often" and
"when" does not imply that Congress felt that the relationships of
some holding companies to commerce were negligible or that the
abuses were other than general in nature. Those words merely
recognize that interstate activities are not necessarily constant
and that the abuses may arise from time to time. That is enough,
however, to support legislative action. See Board of Trade of
City of Chicago v. Olsen, 262 U. S. 1
262 U. S. 40
"The growth of the holding company systems has frequently been
primarily dictated by promoters' dreams of far-flung power and
bankers' schemes for security profits, and has often been attained
with the great waste and disregard of public benefit which might be
expected from such motives. Whole strings of companies with no
particular relation to, and often essentially unconnected with,
units in an existing system have been absorbed from time to time.
The prices paid for additional units not only have been based upon
inflated values, but frequently have been run up out of reason by
the rivalry of contending systems. Because this growth has been
actuated primarily by a desire for size and the power inherent in
size, the controlling groups have in many instances done no more
than pay lip service to the principle of building up a system as an
integrated and economic whole, which might bring actual benefits to
its component parts from related operations and unified management.
Instead, they have too frequently given us massive, overcapitalized
organizations of ever-increasing complexity and steadily
diminishing coordination and efficiency."
Report of the National Power Policy Committee on Public-Utility
Holding Companies, H.Doc. 137, 74th Cong., 1st Sess., p. 5.
"As has been pointed out above, the purpose of section 11 is
simply to provide a mechanism to create conditions under which
effective Federal and State regulation will be possible. It is
therefore the very heart of the title, the section most essential
to the accomplishment of the purposes set forth in the President's
S.Rep. 621, 74th Cong., 1st Sess., p. 11.
The contention also is made that the fact that § 11(b)(1)
requires disposition of security holdings and the termination of
relationships which antedate the passage of the Act is fatal to its
validity. But it merely requires that such holdings and
relationships shall not continue in the future. There is no
punishment for past events. Certainly there is no constitutional
requirement that the status quo
be maintained. See
United States v. Trans-Missouri Freight Assn., 166 U.
, 166 U. S.
"As has been explained above, the title does not require the
dumping or forced liquidation of securities. Such disposition as
may be necessary can be accomplished by reorganization which will
equitably redistribute securities among existing security holders.
Insofar as there may be some redistribution of the securities of
operating companies through investment banking channels, this will
not result in a substantial net increase in the supply of utility
securities on the market, because, for every block of operating
securities distributed, there will be a corresponding block of
holding company securities retired. The net effect of such changes
will be to strengthen the market for utility securities generally
by replacing holding company securities with sound operating
company securities. Such operations, primarily of a refunding
nature, should strengthen, rather than weaken, the credit of
S.Rep. 621, 74th Cong., 1st Sess., p. 16.
North American has already disposed of its holdings of Detroit
Edison Company common stock under a plan distributing the stock to
North American's stockholders over a period of time. In re The
North American Company,
Holding Company Act Release No.
Under § 11(c), holding companies are given at least a year to
comply with an order of the Commission under § 11(b). The
Commission is also authorized to extend the time for an additional
year upon a proper showing.