SECURITIES AND EXCHANGE COMMISSION-EXPLANATION OF AMENDMENTS TO THE TRUST INDENTURE ACT OF 1939

GENERAL OBJECTIVES OF STATUTE

In general the Trust Indenture Act of 1939 requires that bonds, notes, debentures, and similar securities publicly offered for sale, except as specifically exempted by the act, be issued under an indenture which meets the requirements of the act and has been duly qualified with the Commission. The act requires the indenture to be qualified, to designate standards of eligibility and qualification of the corporate trustee, to outlaw exculpatory provisions with respect to the liability of the indenture trustee, and to provide provisions by which the securities issued thereunder may be protected and enforced.

WHAT THE BILL WOULD DO

The amendments embodied in the bill are recommended by the Securities and Exchange Commission, which is of the opinion that such changes will materially assist in the enforcement of the statute without altering its basic provisions and purposes. In brief, the proposed amendments would (1) conform the provisions relating to the size of offerings which are exempted from registration to amendments proposed in the Securities Act of 1933, (2) would extend the time within which certain applications for exemption from the act might be filed, and (3) would provide an administrative remedy during the entire period following the filing of the application for qualification and before its effective date. The specific amendments by which such changes would be effected are explained more fully below.

EXPLANATION BY SECTIONS.

Section 1. Increase of exemption from $250,000 to $500,000

Present law.-Section 304 (a) (8) presently exempts any security to be issued otherwise than under an indenture in an aggregate principal amount not to exceed $250,000 within a period of 12 consecutive months.

Problem. Since it is proposed to increase the exemption in section 3(b) of the Securities Act of 1933 from $300,000 to $500,000, the Commission believes that a similar increase should be made in the subject exemption.

Remedy in the bill.-To accomplish the foregoing result it is proposed to amend section 304 (a) (8) to strike out the $250,000 figure and insert in lieu thereof $500,000.

Section 2. Extension of time within which to file applications for exemption

Present law.-Section 304 (c) of the Trust Indenture Act of 1939 presently permits the filing of an application for exemption from provisions of the act where the change in an indenture would require the consent of holders of securities outstanding under the indenture or would impose an undue burden on the issuer having due regard to the public interest and the protection of investors. However, this application may be filed only if there are outstanding at the time of filing securities which were outstanding prior to or within 6 months after August 3, 1939.

Problem. In anticipation of the fact that the opportunity to file application for exemption would some day expire, most companies have inserted such provisions of the act in their indenture to become effective when such old indenture securities are no longer outstanding. However, in some cases there was a delay in inserting such provisions, so that there may be a period of time when such a company would be unable to do mortgage financing because of its inability to comply with certain provisions of the act under the standards of this provision. Remedy in the bill.-In order to afford such companies an opportunity to bring their indentures fully into compliance with the act without undue hardship, the Commission proposes to amend such provision so as to extend the time of filing applications for exemption thereunder if securities were outstanding when the application is filed which were outstanding on January 1, 1959. Section 3. Administrative remedies

Present law. Section 305 (b) of the Trust Indenture Act of 1939 presently authorizes the Commission to enter an order in accordance with section 8(b) of the Securities Act of 1933 if it finds after notice and opportunity for hearing

that the security is not to be issued under an indenture, that the indenture does not conform to the requirements of sections 310 to 318 of the act, or any person designated as trustee under the indenture is not eligible or qualified under section 310 of the act.

Problem.-Section 8(b) of the Securities Act of 1933 requires that the administrative proceeding be instituted not later than 10 days after the filing of the registration statement and the opportunity for hearing must be afforded within 10 days after such notice.

Administrative experience has shown that section 8(b) does not permit sufficient time within which to examine the material filed and to institute the proceeding. Accordingly, the Commission is left without an effective administrative remedy unless the applicant for some reason files an amendment which would constitute a new filing date.

Remedy in the bill.-The Commission recommends that section 305(b) be amended to eliminate the reference to section 8(b) of the Securities Act of 1933 and to authorize the institution of such administrative proceedings at any time prior to the effective date of the registration statement, which hearing shall be held within 15 days after such notice.

MEMORANDUM OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION ON AMENDMENT PROPOSED IN SECTION 3 OF S. 1180

The statement of comments of the American Bar Association with respect to the proposed amendment to section 305(b) of the Trust Indenture Act of 1939, contained in section 3 of S. 1180, is somewhat puzzling. The statement indicates in its conclusion that a registrant proposing to issue debt securities under a qualified indenture would thereby be placed under a greater handicap in making a timely offering of such securities than the issuer of securities registered only under the Securities Act of 1933. This conclusion is not justified.

Section 305(b) of the act as presently in effect permits the Commission to test the conformance of the indenture with the requirements of the act and the eligibility and qualification of the trustee under the standards of the act in a proceeding equivalent to section 8(b) of the Securities Act of 1933. Because of the time limits imposed within which an action must be commenced under section 8(b), and in view of the opinion of the Supreme Court in Jones v. SEC, 298 U.S. 1 (1936) which recognizes the right of the Commission to institute a proceeding before the effective date of a registration statement under section 8(d) of the Securities Act, section 8(b) has not been utilized for many years as an administrative remedy under the Securities Act, the Commission relying upon its jurisdiction under section 8(d) to institute stop-order proceedings.

The Trust Indenture Act does not now contain provisions comparable to section 8(d) of the Securities Act to test the adequacy of the indenture or the eligibility and qualification of the trustee. This therefore leaves the Trust Indenture Act without an effective administrative remedy after the first 10 days have expired from the date of filing with respect to the major areas in which the Commission must function under that act. In effect, once this first 10 days has elapsed (or 10 days after any amendment which may be filed) the Commission may in effect do no more than suggest certain changes with respect to the indenture or the qualification of the trustee. The proposed amendment would authorize the Commission to institute the administrative proceeding any time before the effective date of the application for qualification of the indenture. It should be noted that a clarifying modification was suggested by the Commission at the hearing on June 18, 1959.

The amendment in the form now proposed by the Commission conforms the proposal generally to section 8(d) of the Securities Act with the exception that under the Securities Act a stop-order proceeding may be instituted both before or after the effective date of the registration statement. In this way the treatment under the Trust Indenture Act will be substantially equivalent to that provided under the Securities Act.

The changes embodied in the amendment are completely reasonable and necessary if the Commission is to have an effectual administrative remedy in this area.

STAFF MEMORANDUM ON AMENDMENTS TO S. 1180, THE TRUST INDENTURE ACT OF 1939

The Trust Indenture Act of 1939 requires that bonds, notes, debentures, and other debt securities which are publicly offered for sale must be issued under trust indentures which meet certain requirements specified in the act. The requirements include selection of an institutional trustee and disqualification of a trustee for certain conflicts of interests. The indenture is required to contain provisions designed to protect security holders and to impose on the trustee a duty to represent the security holders affirmatively. The act includes a civil liability for false or misleading statements or misleading omissions and provides a criminal penalty for willful violation of the act or rules and orders under it or for willfully making untrue statements or misleading omissions of material facts.

If the security is registered under the Securities Act of 1933, the requirements of the Trust Indenture Act become part of the requirements for registration. If the securities do not have to be registered under the 1933 act, the indenture must be separately qualified under the 1939 act.

The 1939 act contains a number of exemptions, including the two described below, which are expressed in terms of dollars.

Section 1. Increase in exemption

The Trust Indenture Act of 1939 (par. 304(a)(8)) completely exempts from its requirements securities of any issuer not covered by an indenture, up to a total of $250,000 within any period of 12 consecutive months.

It also completely exempts (par. 304(a) (9)) securities issued under an indenture which limits the principal outstanding thereunder to $1 million or less, but not more than a total of $1 million of securities can be issued under this exemption during any 36 consecutive months. The paragraph does not impose any requirements on these indentures.

S. 1180 would increase the annual exemption under the first exemption (304 (a) (8)) for debt securities not covered by an indenture from $250,000 to $500,000.

No increase is proposed in the exemption under the second exemption (304 (a) (9)) for securities issued under indentures limited to $1 million, and further limited to $1 million over 36 consecutive months.

The

Securities which exceed the $250,000 figure for a year are ordinarily issued under exempted indentures under the second exemption (304 (a) (9)). effect of the proposed amendment would be to eliminate the need of any trust indentures for issues between $250,000 and $500,000 in any year (though these indentures need not be qualified and no requirements are imposed for them), and to make the exemption of $1 million over 36 consecutive months go further by not having to include these issues between $250,000 and $500,000.

At the present time, a corporation may issue $1,750,000 of debt securities over a 3-year period without observing the requirements of the Trust Indenture Act: $1 million under section 304 (a) (9), and $250,000 a year for each of 3 years under section 304(a) (8). Under the proposed amendment, the corporation could in 3 years issue $2,500,000 free from the requirements of the act: $1 million under section 304(a) (9), and $500,000 a year for each of 3 years under the amended section 304 (a) (8).

The proposed increase is based on the analogy of the proposed increase in the discretionary authority in section 3 (b) of the Securities Act of 1933. The 1933 act originally authorized SEC to grant, in its discretion, an exemption limited to $100,000; in 1945 the figure was raised to $300,000; in 1955 and 1957, the Senate passed measures which would have increased this $300,000 figure to $500,000, but in neither case did the measure become law. S. 1178 would increase this figure to $500,000. This exemption is an annual one, for an issuer and its affiliates. Accordingly, over a 3-year period, the issuer could put out $900,000 of securities under the present small issue exemption; $1,500,000 of securities could be issued under the small issue exemption if increased to $500,000.

The exemption in paragraph 304 (a) (8) of the 1939 act is a complete exemption. The exemption under section 3(b) of the 1933 act is a discretionary, permissive provision, under which SEC has issued regulation A. There is a considerable degree of control over the issuance of securities under regulation A. And it is relevant to note that S. 1178 contains proposals to tighten further the controls over these exempted securities, in sections 5 and 10, along with the proposal to increase the amount which SEC may exempt.

Section 2. Extension of waiver

Section 304 (c) provides for the granting of an exemption from any one or more of the provisions of the act for securities issued under an indenture, if at the time the application is filed, securities are outstanding under the indenture which were outstanding within 6 months of the enactment of the act, i.e., by February 4, 1940. The exemption must be granted if the Commission finds that requiring compliance with the provisions involved (1) would require consent of the holders of outstanding securities, or (2) would impose an undue burden on the issuer, having due regard to the public interest and the interests of investors. S. 1180 would amend this to provide that this exemption would apply if, at the time of the application, there are outstanding any securities issued under the indenture in question which were outstanding either on February 4, 1940, or on January 1, 1959. (Continued reference to securities issued within 6 months of the enactment of the 1939 act seems unnecessary and confusing.)

SEC states that most companies have already inserted in their indentures all the provisions required by the act. However, in one case (and there may be a few other cases) securities were issued after February 4, 1940 (the last such series was issued in 1949, with a maturity date of 1983) under an indenture which did not completely satisfy the act. Waivers for these post-1940 securities were granted with respect to certain provisions of the act, under section 304 (c), on the basis of the pre-1939 securities then outstanding. The last remaining bonds of the pre-1939 issues will mature in 1966 (they would have been retired by now except for this provision). The several series issued under the indenture since 1949 have provided that they will be subject to all the provisions of the act, when the 1949 and earlier series have been retired. When the pre-1939 securities mature, in 1966 or earlier, the SEC will have no further authority to permit the issuance of debt securities under this indenture until the retirement of all the 1949 and earlier series, however desirable it might be.

Section 3. Postponement of effective date

The third amendment which would be made by S. 1180 relates to the procedures available to SEC in case the registration statement (in the case of se curities subject to the Securities Act of 1933) or the application to qualify (in case of other securities) does not appear to satisfy the requirements of the Trust Indenture Act.

Under the present law (sec. 305(b) and sec. 307 (e)), if SEC finds that the registration statement or the application to qualify shows that (1) the security is not issued under an indenture, or (2) the indenture does not comply with the act, or (3) the trustee is not qualified or has a conflicting interest, it may, prior to the effective date of registration or qualification, issue an order refusing to permit the registration to become effective. This may only be done, however, under the procedure set forth in section 8(b) of the Securities Act, i.e., notice must be given within 10 days of the filing of the statement or application, and an opportunity must be given for a hearing within 10 days.

This is the same procedure specified in the Securities Act for cases where SEC finds the registration statement "is on its face incomplete or inaccurate in any material respect." It differs from the "stop order" procedure under section 8(d) of the Securities Act under which the SEC can suspend the effectiveness of a registration statement at any time if SEC finds the statement “includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading.” S. 1180 would amend section 305(b) of the Trust Indenture Act to provide that SEC may give notice at any time up to the effective date of a registration statement or an application for qualification. This notice would have the effect of suspending the effectiveness of the statement, and must provide an opportunity for a hearing within 15 days after the notice. SEC may thereupon issue an order refusing to permit the registration statement to become effective until the objections have been met, if the securities are not under an indenture or if the indenture does not conform to the Trust Indenture Act or if the trustee is not eligible or has a conflicting interest.

In the 85th Congress, SEC recommended a provision which expressly authorized it to suspend the effectiveness of a registration statement or application for qualification under these circumstances. This express provision is not included in S. 1180, but the effect is the same. And in the hearings before the House Interstate and Foreign Commerce Committee, SEC recommended that a provision expressly authorizing suspension be added to the bill.