Burlington Northern Inc., the nation's largest railroad in terms of track miles, has not "clearly reflected" in public reports a decline in the profitability of its freight business since 1970 nor the degree of deferred rail facility maintenance, the Securities and Exchange Commission said yesterday.
In its first significant decision affecting rail corporations since legislation last year eliminated an exemption from SEC regulation that had applied to rail securities, the agency said that since about 1958, average rail and tie replacements by the Burlington have been one-half the levels in the 1940s and 1950s, despite increased train weights and freight business.
Because of rail accounting methods, decisions to replace or not replace tracks have a more immediate impact on reported profits than to similar decisions on other capital spending and the Burlington may face "disproportionately large" requirements to modernize facilities in the future, the SEC said.
Under yesterday's order, to which the railroad consented without admitting or denying any of the findings, the St. Paul-based firm must conduct a study of its accounting procedures and must modify future reports to investors to provide more adequate disclosure of such factors as deferred maintenance along its 25,000-mile system.
More important for the rail industry, yesterday's order amounted to an initial warning by the SEC about the course it has begun to follow in regulating rail company offerings and disclosures to investors.
The SEC said Burlington's "deficiencies . . . may not be unique" and emphasized to railroad firms the agency's view that "complete, timely and accurate information" on such matters must be provided.
The Burlington Northern was born March 2, 1970, in a merger of the Great Northern, Northern Pacific and Chicago, Burlington & Quincy railroads, culminating a combination of the so-called "Northern lines" that had been proposed originally in 1893. BN also is a major land owner and is engaged in natural resources.
Charges that the merged company has been making inadequate disclosure are not new. Multimillionaire industrialist Norton Simon resigned from the Burlington board of directors in 1974 and said that management was "screwing the American public."
Specifically, Simon accused the railroad of "not responsibly" disclosing financial information at a time when rail securities were subject only to virtually nonexistent Interstate Commerce Commission oversight. BN president Louis W. Menk rejected the Simon allegations at the time.
The regulatory agency said, in its order, that if BN had allocated fixed charges related to transportation in its reports on rail profits, the contribution of transportation to overall profits would have been "materially reduced" from 1970 through 1975.
The SEC's investigation of BN reporting had been prompted by Simon's resignation and was started in April 1974.Menk, now chairman, said yesterday the agreement to settle with the SEC was "made solely for the purpose of disposing of the issues. . ."
Menk noted that the SEC, in its study, said BN was making large expenditures for plant and equipment "and does not question. . . management's discretionary decisions with respect to levels of maintenance. . ."
The report ordered by the SEC must be completed within six months, after which BN's board is expected to take some action to revise accounting and reporting activities. BN has hired outside lawyers to work with its own personnel and auditors in compiling the report.
In a related development yesterday, the SEC said that as of Oct. 1, all companies that previously reported to the ICC, Federal Power Commission. Federal Communications Commission and Civil Aeronautics Board now must file regular quarterly and annual reports with the SEC.