Presto! SEC loses another battle Cookware maker

WASHINGTON — The Securities and Exchange Commission is on a roll in the courts — but not a good one.
The 7th U.S. Circuit Court of Appeals in Chicago ruled this month that National Presto Industries Inc., an Eau Claire, Wis.-based company best known for selling cookware that carries the “Presto” name, doesn’t have to register as a mutual fund.
Few SEC cases reach the federal appeals court level, and the ruling follows three major overrides of SEC rules in the past year (InvestmentNews, April 23).
The Investment Company Act of 1940 regulates companies that are in the business of investing in securities, the Chicago court noted in a unanimous ruling from the three judges who heard the case.
“But firms can be dragged within the act’s coverage kicking and screaming, even though they depict themselves as operating businesses rather than as managing other people’s money,” if the company holds investments that total more than 40% of its assets, Judge Frank Easterbrook wrote in his opinion. Other companies, including Microsoft Corp. of Redmond, Wash., have been in the same situation.
National Presto began divesting its manufacturing facilities in the 1970s and contracted production to other companies. Financial assets made up 92% of the company’s assets in 1998 and still were as high as 62% in 2003.
The U.S. District Court for the Northern District of Illinois in Chicago ruled in favor of the SEC after the commission required National Presto to register as a mutual fund in 2002. The District Court went so far as to prevent National Presto from getting out of mutual fund registration by reducing its investments to less than 40%, despite the fact that the SEC had said that the company could do that in order to avoid registration.
“The result was a regulatory mismatch,” Mr. Easterbrook said in the appellate opinion. Mutual fund companies come under many governance requirements not applied to operating companies, and Grant Thornton LLP of Chicago, which had been auditing the company’s financial statements, resigned last year after the SEC questioned its certification of the statements.
That prevented National Presto from filing its financial reports, and stock exchanges then threatened to delist the company.
“One senses … that the agency [or its senior staff] is in a snit because Presto declined to do what many other firms with excess liquid assets have done,” which is to apply to the SEC for an exemption, as Microsoft did, the appeals court said.
“A firm’s refusal to kowtow to an agency is not a good reason to force its investors to bear unnecessary costs,” the appeals court said, concluding that National Presto is an operating company as it presents itself to be, not an investment company. That leaves National Presto free to drop its mutual fund registration.
“We are delighted with both the decision and the outcome,” National Presto chief executive Maryjo Cohen said in a statement. The decision “is a valuable legal precedent which will no doubt be cited in future cases,” she added.
“We’re just trying to get back into normalcy now with our audited financial results,” said Randy Lieble, Presto’s chief financial officer.
SEC spokesman John Heine declined to comment about the case.
But John Baker, an attorney in the Washington office of Philadelphia-based law firm Stradley Ronon Stevens & Young LLP, rose to the SEC’s defense in his critique of the case on the FundLaw website.
SEC decisions to deregister a company as a mutual fund “are subject to appropriate conditions if necessary for the protection of investors, and those conditions surely would include the filing of audited financial statements,” he wrote. Mr. Baker declined to comment further.