That concern does raise a problem since if we are unable to safeguard sensitive information obtained in an investigation then our ability to obtain that information and consequently our effectiveness as a law enforced agency would be compromised.

As the matter stands at present Lockheed has agreed to let our staff look at the documents which contain the details and this has been done. But Lockheed has refused to turn over the documents or to permit our staff to make notes of identifying details in certain documents. Our staff believes that it cannot allow persons under investigation to impose conditions upon the right of the Commission to obtain information.

I hope that this matter can be satisfactorily resolved without the necessity for litigation with Lockheed which would not only result in delay but I believe would be counterproductive both from our viewpoint and from the viewpoint of the company.

With respect to your second question, that is the success we have had in our new program of obtaining voluntary disclosure from corporations concerning such payments, this has proved to be a slow process. Under the circumstances however this is understandable.

First the company must review its particular situation and decide what to do. While we believe that voluntary disclosure is the proper course of action, as well as being less painful than compelled disclosure, those who have the responsibility for decisions in the company may be uncertain at least initially as to what such a decision entails. Even after such a decision is made considerable time is required to implement it. By that I mean once a company decides to embark on such an effort its first step would normally be to make inquiries within its own organization as to the possible scope and nature of the payments which may have been made. In the case of a corporation operating in numerous foreign countries, this will necessitate rather searching inquiries concerning operations in various foreign countries and verification internally of the information thus obtained. It would seem quite possible that officers and employees of the corporation who have engaged in such activities might be reluctant to tell the full story even to their superiors.

Once the information is assembled the company then has to evaluate it in order to determine the extent and nature of any problem it may have. We would naturally expect that a company which comes to us in order to discuss a disclosure question be in a position to provide us with the necessary information.

I am happy to report to you, however, that there has been what I think may be something of a breakthrough in this area in connection with a program voluntarily undertaken by Cities Service Co. after consultation with the Commission's staff to determine whether any illegal political contributions or illegal payments have been made on behalf of that company or its subsidiaries either within or outside the United States, as disclosed in a public report filed with the Commission by that company on September 23, 1975, and in an amendment to a pending registration statement under the Securities Act which amendment was filed on the same day. The program was instituted after a preliminary inquiry by the company indicated the existence of possible illegal payments made in foreign countries.

To summarize yet more if I may, they have an audit committee of the board of directors which was directed to conduct an investigation of all matters thus far discovered as well as any similar activities involving the company either within or outside the United States during the last 5 years.

The audit committee was authorized to incur expenses for counsel and auditors.

The board of directors directed its foreign subsidiaries to cease all such arrangements and to report to the chairman of the audit committee that they have complied.

The company's audit committee has engaged independent counsel and auditors to proceed immediately with the investigation and to report their findings and recommendations directly to the audit committee. Future reports of the audit committee concerning the progress and results of the investigation will be filed with the Commission on form 8-K, which is our form for the current reporting of material information.

The company has also advised the staff that all documents relating to the investigation will be made available to the staff upon request.

I have with me a copy of the company's report filed on September 23, 1975. While this is a fairly lengthy document, covering about six-and-one-half pages I think it might be worthwhile to include it in the record since it contains what I regard as a rather good description of how a company can go about dealing with this problem.

Mr. Nix. Without objection it may be inserted in the record at this point.

[The report referred to follows:]

EXCERPTS FROM REPORT OF THE CITIES SERVICE Co. TO THE SECURITIES AND EXCHANGE COMMISSION

COMMISSION FILE NO. 1-1093 (FORM 8-K CURRENT REPORT)

Pursuant to Section 13 or 15 (d) of The Securities Exchange Act of 1934 For the month of September, 1975. Cities Service Company (Exact name of registrant as specified in charter). Box 300, Tulsa, Oklahoma 74102 (Address of principal executive offices).

ITEM 13-OTHER MATERIALLY IMPORTANT EVENTS

In May, 1975 the Company initiated an inquiry into its international operations to determine whether any illegal political contributions or other illegal payments have been made on behalf of the Company or any of its subsidiaries. The inquiry so far, which has been conducted with the assistance of outside counsel, has been principally confined to interrogation of approximately 14 officers and employees of the Company and its subsidiaries, primarily confined to those in the Company's international operations who are believed to be most likely to have knowledge of any such activities. To date, the inquiry has not involved an examination of files and records of the Company or its subsidiaries other than those referred to by the persons being interrogated.

As a result of the inquiry to date, the Company has determined that in a prior year an employee of a subsidiary operating overseas was provided with funds to cover expenditures totaling $30,000 for political purposes in a foreign country. The payment was disbursed from the Company's head office in the United States and approved by an Executive Vice President and by its General Counsel both of whom are members of the Company's Board of Directors. Although the disbursement was made after the Company had been advised by the manager of the Company's subsidiary that he had consulted with local counsel, it now appears that such consultation was informal and that the legality of such expenditures

under local law is not free from doubt. Although the Company has no direct assurance as to the ultimate disposition or use of the funds, employees of the subsidiary familiar with the circumstances involved have informed the Company that they believe none of such funds were paid to any governmental official. The inquiry also disclosed that these payments were channeled via an intermediary through a Swiss bank account of the employee who initially made the payments and were disguised on the books of the Company's subsidiary.

The payments were improperly deducted for U.S. Federal income tax purposes. The Company has filed an amended Federal income tax return for the year in question deleting this item as a deduction and has paid additional taxes and interest resulting therefrom. The Company's Federal tax returns for the year have not yet been audited and this matter is subject to examination by the Internal Revenue Service.

The inquiry also disclosed that a subsidiary operating overseas paid $15,000, through a foreign lawyer, to a lobbyist in the country of the subsidiary's operation, against an invoice which was dated approximately three months prior to its receipt. The transaction was initially recorded on the records of the subsidiary as a payment for technical services. This entry has been amended to reflect the precise nature of the services rendered.

The Company's inquiry has also discovered that for a number of years a subsidiary operating overseas has made arrangements for rebates from brokers and suppliers and various payments from other sources for the purpose of generating cash funds that were unaccounted for on the books of such subsidiary. Since January 1, 1973, receipts from these sources appear, on the basis of unofficial records examined by the Company's internal audit staff, to have amounted to approximately $600,000. The funds appear to have been used for business purposes of the subsidiary. The Board of Directors of the Company has ordered these arrangements terminated and the Company has retained local counsel to resolve any violations of local laws or regulations which may have resulted from these practices.

None of the foreign operations or subsidiaries in which any of the abovedescribed activities have been discovered to date are material in relation to the Company's operations as a whole.

The results of the above inquiry were initially reported to the Audit Committee of the Company's Board of Directors. At its meeting on August 26, 1975, the Board of Directors received a written report of all matters discovered in the course of the inquiry. At such meeting, the Board directed the Audit Committee, composed entirely of outside directors, to conduct a complete and adequate investigation of all matters mentioned in the report and, with respect to the past 5 years, any similar activities involving the Company, either within or outside the United States, any use of corporate funds for political contributions or payments to government officials within or outside the United States, or any accumulation or use of corporate funds without their being properly accounted for, and to report the status and results of its investigation before November 30, 1975 and periodically thereafter until the investigation is complete. The Audit Committee of the Board is comprised of Messrs. John F. McGillicuddy, Foster Bam, James O. Boisi and Clifford W. Michel.

The Audit Committee was authorized and directed to incur such expenses in connection with its investigation and report as it deems necessary or desirable, including the fees and expenses of outside legal counsel and an independent public accounting firm which the Committee may select to advise it.

The Board of Directors also directed the management of the foreign subsidiary referred to above to terminate all arrangements which it has had for the receipt and expenditure of funds in cash transactions not accounted for on its books, to cease that and any similar practice, and to avoid that or any similar practice in the future. to report promptly to the Chairman of the Audit Committee of the Board that such directions have been complied with. By letter to the Chairman of the Audit Committee, the manager in charge of such subsidiary's operations has confirmed that all such arrangements have been terminated.

The Audit Committee was directed to broaden its investigation of the affairs of this foreign subsidiary to determine whether or not any officer, director or employee of the subsidiary has been guilty of any fraud or defalcation in the management of the assets and affairs of the subsidiary.

The Board also directed the Chairman of the Board to issue a Policy Statement in substantially the following form:

POLICIES:

1. The use of Corporate or subsidiary funds or assets for any unlawful or improper purpose is strictly prohibited.

2. No undisclosed or unrecorded fund or asset of the Corporation or any subsidiary shall be established for any purpose.

3. No false or artificial entries shall be made in the books and records of the Corporation or its subsidiaries for any reason, and no employee shall engage in any arrangement that results in such prohibited act.

4. No payment on behalf of the Corporation or any of its subsidiaries shall be approved or made with the intention or understanding that any part or such payment is to be used for any purpose other than that described by the documents supporting the payment.

5. Any employee having information or knowledge of any unrecorded fund or asset or any prohibited act shall promptly report such matter to the Auditor General of Cities Service Company.

6. All managers shall be responsible for the enforcement of and compliance with this policy including necessary distribution to ensure employee knowledge and compliance.

7. Appropriate employees will periodically be required to certify compliance with this policy.

8. This policy is applicable to Cities Service Company and all its domestic and foreign subsidiaries.

The Board directed that the Policy Statement be distributed to all officers and directors and to each employee whose responsibilities are such that he could violate the prohibitions of the Statement.

On September 9, 1975 the Audit Committee of the Board held an initial meeting for the purpose of undertaking the investigation directed by the August 26, 1975 Resolution. Following that meeting the Audit Committee engaged the services of the firm of Cleary, Gottlieb, Steen & Hamilton, New York, New York, as independent counsel to the Committee. Cleary, Gottlieb, Steen & Hamilton has heretofore assisted the Company with the inquiry into the international operations of the Company initiated in May 1975 and will assist and advise the Audit Committee with respect to carrying out its responsibilities under the August 26, 1975 Resolution.

The Audit Committee also engaged the services of the firm of Cummings and Lockwood, Stamford, Connecticut, as independent counsel to provide special assistance to the Committee particularly with respect to reviewing the results of the investigation heretofore conducted by the Company and reviewing the adequacy of the report that will be prepared by the Audit Committee pursuant to the August 26, 1975 Resolution. Mr. Foster Bam, a member of the Board and of the Audit Committee, is a partner in Cummings and Lockwood.

The Audit Committee also engaged the services of Peat, Marwick, Mitchell & Co., Tulsa, Oklahoma, as independent accountants, to review the results of the investigation heretofore conducted by the Company and to assist the Andit Committee with its responsibilities under the August 26, 1975 Resolution. The Audit Committee has requested that a partner of Peat, Marwick, Mitchell & Co., not domiciled in Tulsa, Oklahoma, review the results of the investigation which has heretofore been conducted by the Company.

The Audit Committee instructed Cleary, Gottlieb, Steen & Hamilton: Cummings and Lockwood, and Peat, Marwick, Mitchell & Co., to immediately proceed with the investigation pursuant to the Audit Committee's direction and to report their findings and recommendations directly to the Audit Committee.

A written report prepared by Cleary, Gottlieb, Steen & Hamilton describing in detail the results of the inquiry initiated by the Company's management in May 1975 has been turned over to the Audit Committee for its consideration. Also submitted to the Audit Committee at its initial meeting were extracts from a report filed with the Securities and Exchange Commission by another company describing an investigation conducted on behalf of such other company. The extent and nature of the investigation to be conducted by and on behalf of the Audit Committee into the various matters referred to it by the Board is currently under consideration by the Committee.

The inquiry described above was voluntarily undertaken by the Company; the Audit Committee of the Board of Directors has been kept informed of its progress and results. The matters described above which were uncovered in the course of the Company's inquiry have been voluntarily disclosed by the Company to the

Securities and Exchange Commission and the expanded investigation by the Audit Committee described above has been voluntarily undertaken.

Future reports of the Audit Committee to the Board of Directors concerning the progress and results of the Committee's investigation will be filed with the Securities and Exchange Commission as Current Reports on Form 8-K.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: September 1975.

CITIES SERVICE CO.,
By PARK HOLLAND, JR.,
Secretary.

Mr. LOOMIS. I think the policy statement which the board directed its chairman to issue to all officers and employees of the company is also of interest. It is to be substantially as follows:

The use of corporate or subsidiary funds or assets for any unlawful or improper purpose is strictly prohibited.

No undisclosed or unrecorded fund or asset of the corporation or any subsidiary shall be established for any purpose.

No false or artificial entries shall be made in the books and records of the corporation or its subsidiaries for any reason and no employee shall engage in any arrangement that results in such prohibited act.

No payment on behalf of the corporation or any of its subsidiaries shall be approved or made with the intention or understanding that any part of such payment is to be used for any purpose other than that described by the documents supporting the payment.

Any employee having information or knowledge of any unrecorded fund or asset or any prohibited act shall promptly report such matter to the auditor general of Cities Service Co.

All managers shall be responsible for the enforcement of and compliance with this policy including necessary distribution to insure employee knowledge and compliance.

Appropriate employees will periodically be required to certify compliance with this policy.

This policy is applicable to Cities Service Co. and all its domestic and foreign subsidiaries.

The board directed that the policy statement be distributed to all officers and directors and to each employee whose responsibilities are such that he could violate the prohibitions of the statement.

I think that this is an encouraging development and I hope that other companies having this problem will be willing to proceed along the same lines.

This concludes my statement and I will be happy to answer any questions which the members of the subcommittee may have. [Mr. Loomis' prepared statement follows:]

PREPARED STATEMENT OF HON. PHILIP A. LOOMIS, JR., SECURITIES AND EXCHANGE COMMISSION

Mr. Chairman and members of the Subcommittee:

I am pleased to again have the opportunity to appear before this Subcommittee. As the Subcommittee will recall. I appeared and testified on July 17, 1975, with respect to the subject of contributions to officials of foreign governments by American corporations, and at that time, I referred to testimony which I had