SEC Division of Corporation Finance no-action letter: Tennessee Valley Authority

December 14, 2006

Response of the Office of Chief Counsel Division of Corporation Finance

Re:

Tennessee Valley Authority Incoming letter dated December 8, 2006

Based on the facts presented in your letter, the Division of Corporation Finance concurs in the views expressed in your letter regarding the effect of filing information, documents, and reports pursuant to Section 37 of the Exchange Act on the treatment of the TVA and its securities under the Securities Act, the Exchange Act and the Trust Indenture Act of 1939. Capitalized terms have the same meanings you defined in your letter.

Based on the facts presented and on your opinion that the there is a conflict between specific requirements of the TVA Act and the Exchange Act, the Division of Corporation Finance will not recommend enforcement action if, rather than complying with Section 10A(m)(2) of the Exchange Act with regard to the appointment of a registered public accounting firm, TVA complies with Section 2(g)(1)(M) of the TVA Act.

The Division of Market Regulation has asked us to inform you that, based on the facts presented in your letter, the Division of Market Regulation concurs in the views expressed in your letter regarding the effect of Section 37 of the Exchange Act on the treatment of the Tennessee Valley Authority and its securities under the provisions of the Exchange Act cited in your letter that are administered by the Division.

The Division of Investment Management has asked us to inform you that, based on the facts presented in your letter, the Division of Investment Management concurs in the views expressed in your letter regarding the effect of Section 37 of the Exchange Act on the treatment of the Tennessee Valley Authority and its securities under the Investment Company Act of 1940.

The above positions are based solely on the facts presented in your letter. Any different facts or circumstances might require another conclusion. In particular, your letter and our response of course do not extend to situations where material information is omitted that would be necessary to be included to make the statements made, in light of the circumstances in which they are made, not misleading.

Sincerely,

Paula Dubberly Associate Director - Legal

Incoming Letter:

The Incoming Letter is in Acrobat format.

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Tennessee Valley Authority, 400 West Summit Hill Drive. Knoxville,Tennessee 37902-1401 Maureen H. Dunn ExecutiveVce President and General Counsel DEC 0 8 2006 Carol McGee, Esq. Office of Chief Counsel Division of Corporation Finance Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Re: Tennessee Valley Authority Dear Ms. McGee:
The Tennessee Valley Authority ("TVA") is a wholly-owned corporate agency and instrumentality of the United States created by Congress. It exists and operates pursuant to the Tennessee Valley Authority Act of 1933, as amended, 16 U.S.C. $5 831-831ee (2000 & Supp. IV 2004) (the "TVA Act"). In 2004, President Bush signed into law the Consolidated Appropriations Act, 2005, which added section 37 to the Securities Exchange Act of 1934 (the "Exchange Act"). Section 37 requires TVA to file such reports "as would be required pursuant to section 13 if [TVA] were an issuer of a security registered pursuant to section 12," but specifically exempts TVA from having to register its securities with the Securities and Exchange Commission (the "SEC"). As TVA will soon file its first Form 10-K pursuant to section 37, we request the Staff's concurrence with our view that section 37 and filing reports under section 37 will not cause any alteration of the existing treatment of TVA with regard to whether:
Securities issued or guaranteed by TVA are "exempted securities" under the Securities Act of 1933 (the "Securities Act") and may be sold without registration under the Securities Act. Securities issued or guaranteed by TVA are "exempted securities" and "government securities" under the Exchange Act. TVA is excluded from the definitions of "government securities broker" and "government securities dealer" under the Exchange Act.

Carol McGee, Esq.
DEC 0 8 2006
TVA is exempt from sections 14(a)-(d) and 14(f)-(h) of the Exchange Act insofar as they relate to securities issued by TVA. Transactions in TVA securities are exempt from rules governing tender offers under Regulation 14E of the Exchange Act. Debt securities issued or guaranteed by TVA are securities issued or guaranteed as to principal or interest by an agency of the United States for purposes of Rule 15~3-l(c)(2)(vi)(A)under the Exchange Act. TVA is exempt from the Trust Indenture Act of 1939 insofar as it relates to securities issued by TVA, and no independent trustee is required for such securities. Securities issued or guaranteed as to principal or interest by TVA are "government securities" for purposes of the Investment Company Act of 1940. TVA is an agency, authority, or instrumentality of the United States for purposes of the Investment Company Act of 1940. In TVA's opinion, on its face there would appear to be a conflict between the literal requirements of section 10A(m)(2) of the Exchange Act dealing with the appointment of the external auditor by the audit committee and the TVA Act's requirement that the TVA Board of Directors ("Board") engage the services of the external auditor. The Consolidated Appropriations Act, 2005, significantly modified TVA's governance structure. Congress mandated that TVA's three person board of directors be replaced with a nine person Board appointed by the President by and with the advice and consent of the Senate. Congress required the new Board to establish an audit committee, which would be responsible for "recommend[ing] to the Board an external auditor" and "receiv[ing] and review[ing] reports from the external auditor." Additionally,
section 2(g)(l)(M) of the TVA Act provides that the TVA Board shall "engage the
services of an external auditor for the Corporation." This provision conflicts with the auditor appointment provision of section 10A(m)(2) of the Exchange Act, which states that "[tlhe audit committee of each issuer. . . shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer. . . ." By reserving certain actions to the Board and limiting the scope of the responsibility of the audit committee when it amended the TVA Act, Congress specifically restricted the duties of TVA's audit committee and did so in a way that would preclude it from appointing the external auditor as mandated by section 10A(m)(2) of the Exchange Act

Carol McGee, Esq.

DEC 0 8 2006 and the related regulations. The conflicting requirements of the two statutes with respect to the appointment of the extemal auditor place TVA in a situation where compliance with one statute would conflict with the literal requirements of the other. Since Congress - has determined in the case of TVA that selection of external auditors is more appropriately performed by the full Board rather than a subset of the Board, TVA respectfully requests the assurance of the Staff that it will not recommend enforcement action if TVA Eomplies with the audit committee provisions of the TVA Act and not with the provision of section 10A(m)(2) of the Exchange Act dealing with the appointment of the external auditor. For your convenience, enclosed is the relevant portion of the TVA Act. If you have any questions or require additional information, please call the undersigned at (865) 632-4131 or Michael L. Wills, Assistant General Counsel, at (865) 632-7778. If the Staff does not agree with TVA's request, we would appreciate the opportunity to confer with the Staff prior to a written response to this letter. Sincerely, T Maureen 4- H. Dunn Enclosure

ENCLOSURE

SECTIOIV 2 OF THE 'I'VA ACT

Sec. 2. MEMBEI1SFIlP, OPERATION, AND DU.I.IES OF TFlE BOARD OF DIRECrORS. (a) MEMBERSHIP.-- (I) APPO1N'l'MENT.--The Board of Directors of the Corporation (referred to in this Act as the "Board") shall bc composed oS9 membcrs appointed by the President by and with the advicc and consent of the Senntc, at least 7 of whom shall be a legal resident of the scrvice area of the Corporation. (2) CHA1IIbIAS.--The nlc~ilhers of thc Board shall sclcct 1 of the mcrnbers to act as chaimlan of thc Board. (b) QUALIFICATIONS.--To bc eligible to be appointed as a niembel. oS the Board, an individual-- (I) shall be a citizen of the United States; (2) shall have management expertise relative to a large for-profit or nonprofit corporatc, government, or academic structure; (3) shall not be an employec oCthe Corporation; (4) sl~all make fill disclosure to Congress of' any investmen( or other linancinl intelxst that the individual holds in the energy industry; and (5) shall affil-m support Cor the ohjeclivcs and missions, of the Corporation, including being a national leader in technological innovation, low-cost power, and environmental stewardship. (c) RECOMblENDAT1ONS.--In appointing members of the Board, the President shall- (I) co~lsiderecommendations from such public officials as-- (A) the Goveniors of States in the service area; (B) individual citizens; (C) business, industrial, labor, electric power distribution, environmental, civic, and servict: organizations; and (D) the congressional delegations of thc States in the scrvice area; and (2) scck qualikied menibers li.om among persoils who reflect the diversity, including the geographical diversity, and needs of thc service area of the Corporation. (d) TERMS.-- (1) IN GENERAL--A member of the Board shall serve a temi of S ycars. A nien~ber of the Board whose tern1 has expircd may continue to serve aRer the member's term has expired until tlie date on which a succcssor takcs office, except that the member shall not serve beyond the end of the session of Congress in which the term of tlie member expircs. (2) VACANCIES.--A rnclllber appointed to fill a vacancy on the Board occurring before the expiration of the tcm? Cor which the predecessor of the member was appointed shall he appointed for thc remainder orthat tcrrn. (e) QUORUM.-- (1) IN GENERAL.--Five of tl~e membcrs of the Hoard shall constirule ' quorum for the transaction of business. (2) VACANCIES.--A vacancy on the Board shall 11nt impair the power or tl~c Hoard to act. (1) COMPENSKSI0N.-- (1) 1N GENE1UL.--A nlcmber of the Hoard shall be cntitled to receive-- (A) a stipend of--

(i) $45,000 per year; or
(ii)(I) in lhc case of the cllaini~an of any committee of the Board ci;eatcd by ihc Board, $46,000 per ycar; or (1'1) in the case of iht: cliainnan of the Board, $50,000 per year; and (B) travel expenses, including per diem in lieu of sitbsistcnce, in the same manncr as persons cn~ployed intermittently in Governnielll se~vice under section 5703 of title 5, United States Code. (2) ADJUS1MENTS IN STIPENDS.--The amount of the stipend under paragraph (l)(A)(i) shall be adjustcd by the same percentage, at the same time and niatincr, and subject to the same liniitations as are applicable to adj~lstlncnts under section 53 18 of litlc 5, llni~ed States Code. (g) DUTIES.-- (1)15 GENERAL.--The Board shall-- (A) establish the broad goals, objectives, and policics 01the Corporation hat arc appropriate to carry out this Act; (B) develop long-range plans to guide lhe Corporation in achieving the goals. objectives, and policies or the Corporation and provide assistancc to the chicl' cxecutive officer lo achieve thosc goals, objeclives, and policies; (C) ensurc that those goals, objectives, and policies are aclrievcd; (D) approve an annual budget for the Corporation; (E) adopt and submil to Coiigrcss a conflict-of-interest policy applicable to members of the Board and employees of llie Colporation; (F) establish a coiiipensatio~l plan for employees of the Corporation in accordelice with subsection (i); (G) approve all compensation (including salary or any other pay, bonuscs, benefits, incentives, and any other form of remuneration) of all managers and technical personnel that report directly to thc chief executive officer (includiiiy any adjustn~cnt to compensation); (I-I) ensure that all activities of the Corporation are canicd out in compliance with applicable law; (I) create an audit corn~nittee, composed solely of Board members independent of the management of the Corporation, which shall-- (i) in consultation with the illspector general of the Corporation, recommend to the Board an external auditor; (ii) receive and review reports from the external auditor of the Corporation and inspector general of thc Corporation; and (iii) make sucll recorn~nedations to tl~c Board as the audit comn~ittee eoosiders necessary; (J) crcatc such other co~iimittccs of Board members as the Board considers to be appropriatc; (K) conduct such public hearings as it dcems appropriate on issues that could have a substantial cFfefect on-- (i) the electric ratepayers in the service arca; or (ii) tlic ccolio~nic, environmcntal, social, or physical wcll-being of the peoplc of the service area; (L) establish thc electicity rates clinrgcd by the Corporation; and (M) engagc thc services of an cxtcrnal auditor for the Corporation. (2) MEFI'1NGS.--The Board shall meel at least 4 times each year.

• (11) CHIEF EXECUTIVE OFFICER.--
  (I) APPOINTMENT.--The Bonrd shall appoint a person to scrvc as chief exzcutive orficer ot'the Corporation. (2) QUALIFICATIONS.-- (4)IN GENERAL.--'To scrve as cliiefexccutive officer of the Co~porarion, a person-- (i) shall have scnior executive-level management experience in large, coniplcx organizations; (ii) shall not be a cu~~ent member of the Board or l~ave scrvcd as a member of tlie Bonrd within 2 years before being appointed chief cxcci~tive ol'ficer; and (111) shall comply with thc conflict-of-interest policy adopted by the Board. (B) EXPERTISE.--In appointing a chief executive officer, thc Board shall give particular consideration to appointing an individual with experiise in [he clectric industry and with strong financial skills. (3) TENURE.--The chief executive oCficer shall scrvc at the pleasure of lhe Board. (i) COMPENSATION PLAN.-- (I) INGENERAL,.--Thc Board shall approve a compensation plan that specifies all compensation (including salary or any other pay, bonuses, benefits, incentivcs, and any other forrn of remuneratioli) Ibr tlic chief executive officer arid employees of tlie Coi-poration. (2) ANMIAL SURVEY.--Thc cornpe~isation plan shall be based on an annual survey of the pruvailing compensation tor similar positions in privatc industry, including engineering and electric utility companies, publicly owncd elcctric utilities, and Federal, Stale, and local governments. (3) CONSIDEKA'I'1ONS.--The compensation plan shall provide that education, experience, level ol' responsibility, geographic differences, and rctentioi~ and recruitment weds will be taken into account in dercmiining conipensation of employees. (4) POSITIONS AT 011BELOW LEVEL 1V.--The chief executive officer shall detemiine the salary and benetits of employees whose annual salary is not greater than the annual rate payable for positions at level 1V of the Executive Schedule uiider section 5315 of title 5, linited States Codc. (5) POSITIONS ABOVE LEVEL 1V.--On tlie recommendation of the chicf executive officer, the Board shall approve tlie salaries of employees wl~ose annual salaries would be in excess of the annual rale payable for positions at level IV of the Executive
  Schedule under section 5315 of title 5, United Slatcs Codc. [48 Stat. 59, as amended by 119
  Stat. 2963-2966, 16 U.S.C. sec. S31a]
  I
  SEC. "lo Acttun. Enclusurv, 0037E30Y3