devoted to obtaining an understanding of the operation of the business of the issuer and applying the results so as to produce an instrument which will provide adequate security and yet be workable so far as concerns the issuer. The provisions of one section inextricably tie into other sections, and if the Commission is to exercise judgment on the matters set out in the bill, it would be necessary for a representative of the Commission to participate in the actual drafting of the indenture. This means that a representative of the Commission must go into the field and follow the work being done in the preparation of the issue of securities or that the delay and confusion resulting from the necessity of communicating with Washington, often from a considerable distance, will be intolerable; (c) it is reasonable to suppose that the fees charged by trustees will be increased. The act will constitute an invitation to every blackmailer and unscrupulous lawyer to attack the trustee, and, for this reason alone, as well as others that could be mentioned, it would probably be necessary for trustees to increase their charges for acting under indentures. It This legislation means difficulty and delay in the marketing of securities. is well known that the securities market is such that securities must be offered at particular times purely as a matter of fairness to the issuers and to the underwriters. The general nature of the securities business makes it one which can stand so much regulation and no more. This legislation means that the judgment of the Securities and Exchange Commission shall supersede the judgment of officers and directors of the issuer who have spent years in familiarizing themselves with their particular business. 3. The proposed legislation would create new hazards for investors and tend to increase bankruptcies and liquidations. Hasty action by a trustee or other creditor can be disastrous, and yet the liabilities imposed by this legislation will require trustees, as a matter of selfprotection, to be extremely strict with respect to defaults, however technical they may be. The practical effect of the provisions with respect to the liabilities of the trustee will be to make it mandatory upon trustees to be exceptionally cautious. A trustee who fails to take advantage of technical defaults is placed in a position where it will be subject to suit by unscrupulous persons whose only desire is to be bought off from creating annoyance. An issuer will hesitate a long time before issuing securities under an indenture, complex and involved, which must be enforced without regard to the equities of the situation and the possibility of adopting a course which will probably be more favorable to the investor in the long run. The provisions of the bill authorizing the Securities and Exchange Commission to require that trustees have at all times a combined capital and surplus of such specified minimum amount as the Commission deems adequate are susceptible of great injustice. If the Commission fixes the minimum at a very substantial figure many desirable institutions will be excluded from acting and the tendency will be to concentrate trusteeships in New York City institutions. If the minimum is fixed at a low figure, there is the danger that institutions with inadequate resources will be formed and will be utilized for the sole purpose of qualifying under the act. The restricted nature of the business of such institutions will make it impossible to secure adequate financial responsibility. Local institutions in the smaller communities would be unable to qualify in most instances, although they are in better position to keep themselves informed as to the problems and needs of the issuer than are the larger institutions located at a distance. We are taking the liberty of requesting that a copy of this letter be included in the record of the hearings before your committee. Yours truly, THE UNION TRUST CO. OF PITTSBURGH, THE COLONIAL TRUST CO., PITTSBURGH, By ROBERT MORRIS III, Vice President in Charge of Trusts. COMMONWEALTH TRUST CO. OF PITTSBURGH, By R. W. WILLIAMS, Trust Officer. FIDELITY TRUST CO., By ALEXANDER S. SMITH, Vice President. POTTER TITLE & TRUST CO., By J. R. SMITH, Assistant Secretary. FEBRUARY 9, 1939. Senator ROBERT F. WAGNER, Chairman, Subcommittee of Senate Committee on Banking and Currency, Washington, D. C. Re: Barkley bill (S. 477). DEAR SENATOR WAGNER: The undersigned, St. Louis Union Trust Co., herewith presents its protests against passage of the above bill as unworkable and injurious to the small investor, to the small-business man and to the small trust company, on the following grounds: 1. That it tends to drive the best loans into the hands of private investors, leaving for the public issues less sound. 2. That it tends to concentrate in New York and Chicago corporate trusteeships and underwritings speaking in terms of unit volume, giving rise to the concurrent evil of remote control as well as concentration of control, as will hereafter be amplified in the last paragraph hereof. 3. That it tends to disturb honest and mature judgment on the part of corporate trustees in taking action in event of default, and particularly in its present form penalizes inaction on the part of corporate trustees in event of default, even though such is honestly believed for the benefit of the bondholders (and it is the opinion of the undersigned, based on its experience in the past 10 years, that a substantial majority of cases involving default has been worked out more successfully where no action was taken by the trustee or bondholders than otherwise). 4. That the abuses it seeks to cure have occurred only in a small percentage of cases involving default; have been caused in the main not by reason of indenture provisions or lack of them; and that the proposed legislative cure of such abuses will give rise to greater hardships and injury to the small investor (by driving away the large volume of high-grade securities), small business (by taking from it perhaps the only means of financing expansion and replacement programs, because of the disproportionate expense involved), the corporate trustee (by placing a "club" over its head), and to the public at large (by slowing down business). The undersigned wishes further to urge that the correction of such abuses can best be accomplished through educational means rather than by legislative means and Commission control. The experience of the past 9 years has provided to no little extent such education. In reference to the foregoing, the St. Louis Union Trust Co. has a capital of $5,000,000 and a surplus of $5,000,000. It does solely a trust business and is not engaged in general banking. It has approximately 710 bond-issue accounts for which it serves as trustee, aggregating over $417,000,000 face amount. In addition, it has approximately 300 accounts for which it acts as paying agent only. Hence, its interest in the proposed bill is substantial. With further reference to our second objection with reference to concentration in New York and Chicago of corporate trusteeships, we wish to point out that of the number of accounts hereinafter referred to as unit volume as given in the preceding paragraph, only one thereof-representing approximately oneseventh of 1 percent in unit volume-amounts to $80,000,000, or approximately 20 percent of our total dollar volume. Two accounts-representing in unit volume approximately two-sevenths of 1 percent thereof-represent in dollar volume approximately $115,000,000, or approximately 28 percent of such dollar volume. I have been authorized by the Continental National Bank & Trust Co., of Chicago, to advise that the latter institution has a unit volume of approximately 500 accounts, representing in dollar volume somewhat in excess of $200,000,000 of bond issues. This represents approximately five times our amount of business in dollar volume, but in unit volume has only 70 percent of the business of our institution. The situation of this Chicago bank is comparable to a large number of New York banks. It is not unreasonable to expect that in other smaller financial centers the dollar volume per unit volume is even smaller than ours. This is true of other trust companies in our own city. Although no statistics are available, it is believed that in unit volume perhaps only 10 percent of corporate trusteeships and corporate financing is now located in New York and Chicago. If, as the result of the passage of this bill, this unit volume of small business survives at all, it will be driven to the two larger financial centers. Respectfully submitted. ST. LOUIS UNION TRUST Co., Trust Officer, in Charge of the Corporate Trust Department. Hon. ROBERT F. WAGNER, LOS ANGELES, CALIF., February 7, 1939. Chairman, Banking and Currency Committee, United States Senate, Washington, D. C.: Proposed Barkley bill regulating corporate financing contains many good features for protection of investors, but in many respects it unnecessarily stringent. We believe its passage would hinder corporate borrowing, particularly for smaller companies. We bespeak your careful consideration to the detailed protests before Senate Banking and Currency Committee. W. H. THOMPSON, Executive Vice President, California Bank. Hon. ROBERT F. WAGNER, LOS ANGELES, CALIF., February 7, 1939. Chairman, Banking and Currency Committee, Washington, D. C.: Proposed Barkley bill regulating corporate financing contains many good features for protection of investors, but in many respects is unnecessarily stringent. We believe its passage would hinder corporate borrowing, particularly for smaller companies. We bespeak your careful consideration to the detailed protests before Senate Banking and Currency Committee. May we respectfully offer our opposition to certain features of Senate bill 477, now before your committee. It is our belief that its restrictive provisions will undoubtedly hamper corporate borrowing, as also affect acceptance of appointment, except for those obligors whose credit standing challenges possibility of default. We believe the duties imposed upon trustees before and after default with imposed liability for errors may well result in more harm than good. We bespeak for the consideration of your committee amendment of the bill as now proposed, as we feel all reasonable protection for security holders can be accomplished without imposing unjustified burden upon the trustee and without unnecessary restrictions of corporate financing. We bespeak your kind and, we trust, favorable consideration. THE FARMERS & MERCHANTS NATIONAL BANK OF LOS ANGELES, Senator ROBERT F. WAGNER, LOS ANGELES, CALIF., February 7, 1939. Senate Committee on Banking and Currency, Washington, D. C.: Believing restrictive provisions Senate bill 477 relating mortgage trusteeships will hamper adequate financing business interests, thus throttling commercial activities so sorely needed in business restoration. We earnestly urge amendment of bill to remove these unnecessary obstacles. We wish to have our opposition to certain features of Senate bill 477 presented to your committee. Its restrictive provisions will, in our opinion, hamper cor porate borrowing as well as acceptance of appointment except for obligors whose credit standing make default unlikely. We believe the duties imposed upon trustees before and after default with resultant liability for errors will result in more harm than good. We urge amendment of bill and believe all reasonable protection for security holders can be obtained without undue restrictions of corporate financing. This last is more important now than when this bill was first considered. SECURITY FIRST NATIONAL BANK OF LOS ANGELES. ROBERT F. WAGNER, SAN FRANCISCO, CALIF., February 8, 1939. Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C.: Last May the undersigned expressed their apprehensions over restrictive effect enactment Barkley bill would have on corporate borrowing. We find many provisions of bill, as recently introduced, which tend to raise standards of corporate trust administration, but we find also many provisions which from our experience we feel are far more drastic than the public interest requires, and which will greatly increase costs of administration, thereby raising cost of capital to borrowers. The provisions which concern us most are those relating to trustees' duties before and after default, which we believe impose on trustees new liabilities so great that they would deter many corporate trustees in undertaking to act under indentures securing issues of moderate size but entirely legitimate. This would impede free flow of capital, injuring not only corporate trust business but retarding capital developments, with consequent lessening in consumption of capital goods and in employment. Because of these anticipated effects, we believe the public interest will be harmed rather than helped by enactment bill in present form. American Trust Co., the Anglo California National Bank of San Francisco, The Bank of California National Association, California Pacific Title & Trust Co., Crocker First National Bank, of San Francisco, Pacific National Bank of San Francisco, Title Insurance & Guaranty Co., Wells Fargo Bank, and Union Trust Co. (The following letters and statements were submitted after the closing of the hearings for inclusion in the record as authorized by the committee.) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: There is enclosed herewith for the consideration of your committee a draft of certain proposed amendments to Senate bill 477 which the Board of Governors of the Federal Reserve System believes should be incorporated in the bill before it is reported on by your committee. In its annual report to the Congress which was made at the end of January, the Board called attention to the already confused situation in the field of Federal bank examination and supervision. It would feel remiss if, in the light of this report, it should fail to call attention to the possibility, however remote, that this pending legislation might unintentionally add further to this state of confusion in the course of time, if not now clarified by a positive statement in the bill. The Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corporation, which are the three principal Federal bank supervisory agencies, regularly examine banks and require the publication of reports of their condition. With the enclosed amendment, the bill would not only authorize but require these bank supervisory agencies to furnish to the Securities and Exchange Commission such information respecting banks and trust companies as the Commission may need to enable it to discharge its responsibilities under the bill. In the drafting of the bill the Commisison has been most considerate of the Board's point of view on questions involving bank examination and supervision and has from time to time invited the Board's suggestions: and the Board has tried to be helpful in drawing on its past experience in the field of bank regulation. From the beginning of the discussions between the Commission and the Board, we have been assured that the Commission did not wish the bill to be the means of placing on the Commission responsibility or authority for bank examinations. The enclosed amendments are designed to make it clear that the Commission shall not duplicate or supplement any of the work done by the bank supervisory agencies but shall rely on information which such agencies would be directed to furnish under the provisions of section 318 (b), page 47, lines 6 to 22, as amended by the proposed amendment enclosed herewith. Without expressing any opinion as to the merits of the bill as a whole, the Board respectfully requests the committee's favorable consideration of these amendments. Very truly yours, M. S. ECCLES, Chairman. P. S. After the above letter had been prepared, I received your letter of February 15, 1939, requesting the Board's opinion as to the merits of this proposed legislation, which will receive the Board's consideration as soon as practicable. AMENDMENT TO S. 477 On page 47, line 9, before the comma following the word "authorized", insert the words "and directed". Strike out everything commencing with line 24 on page 48 through and including line 18 on page 49 and substitute the following: "(d) Nothing in this title shall be construed as authorizing the Commission or any member, officer, agent or employee thereof to make any examination, inspection, or investigation of, or to require reports from, or to subpena the books, papers, correspondence, memoranda, contracts, agreements or other records of, any bank, banking association, savings bank, trust company, or any other institution, which is subject to examination by the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, or the Federal Deposit Insurance Corporation." BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Washington, February 14, 1939. Hon. ROBERT F. WAGNER, Chairman, Banking and Currency Committee, United States Senate, Washington, D. C. DEAR SENATOR WAGNER: There is transmitted herewith a recommendation of the Federal Advisory Council in regard to Senate bill 477 relating to corporate trusteeships. The Council has submitted the enclosed recommendation to the Board with a request that it be transmitted to the Senate Committee on Banking and Currency for the purpose of having it placed in the record of the hearings before its subcommittee which is considering the bill. Very truly yours, CHESTER MORRILL, Secretary. TOPIC NO. 4-S. 477 (CORPORATE TRUSTEESHIPS) RECOMMENDATION The Federal Advisory Council desires to call the attention of the Board of Governors of the Federal Reserve System to Senate bill 477 relating to the regulation of trust indentures under which securities are issued. The Council feels strongly that the imposition of some of the liabilities as provided in the bill would create contingent liabilities for banks of deposit accept |