fing corporate trusteeships which might be dangerous to themselves and the banking system as a whole. Broadly speaking, no corporations other than banks of deposit have either the financial responsibility or the experience which qualify them to act as corporate trustees. Furthermore, the Council believes that the bill would materially increase the cost of and make more difficult long-term public financing, particularly to smaller corporations, and would thus tend to hinder expansion of plants and businesses at a time when such expansion is particularly desirable in the interest of business recovery. The Council also believes that the restrictions contained in the bill on the right of security holders to waive defaults, and the requirements that the trustee must act in the event of default if it is to avoid liability, would force into receiverships or the bankruptcy courts many businesses that otherwise might survive, particularly in times of depression, with resultant loss to their creditors, including banks, and to their stockholders and to their employees and the communities in which they are located. The Council requests the Board to submit this expression of its opinion to the Senate Committee on Banking and Currency with the request that it be put in the record of the hearings before its subcommittee considering the bill. The Council understands that the record of the subcommittee, in the absence of further hearings, will be closed on February 16, and therefore requests that it be forwarded by that date. Hon. ROBERT F. WAGNER, INVESTMENT BANKERS ASSOCIATION OF AMERICA, Senate Office Building, Washington, D. C. DEAR SENATOR WAGNER: In connection with the hearings on the Barkley bill, you will recall that one member of the Investment Bankers Association committee, Mr. John Sullivan, of Denver, explained in some detail to the subcommittee the extent to which private sales of securities are now taking place, as allowed by the Securities Act, without registration, and the fact that, in our opinion, the increase through the passage of the Barkley bill in the present difficulty and expense of registration would do much to stimulate this process. This is especially true of smaller companies. I ran across the enclosed clippings from the Friday evening edition of the New York Sun, which furnished such an exact and striking illustration of what is going on in this direction that it occurred to me that it might be of interest to you and might explain more easily than anything we could say just how this kind of financing is handled. The American Can Co., which is involved in this case, is, of course, one of the outstanding American industrial corporations. It has raised $10,000,000 by private sale to the First National Bank of New York without any of the delay in time and the cost of registration. The bank which purchased the entire issue will, under the Securities and Exchange Commission regulations, have to hold it for a period somewhat in excess of a year, and then, in the opinion of our lawyers, it will be free to sell it to the public without registration if it wants to or it may continue to hold it as an investment for the full 10 years. This is the type of company whose securities ought to be held by banks and individuals all over the country, instead of which, owing to the provisions of the Securities Act, its entire issue is concentrated in the hands of the First National Bank of New York. It is obvious that investors are not helped by this situation, and certainly the investment banking business is severely damaged, because no underwriter will get any commission and no dealer throughout the country has any opportunity to dispose of the bonds to his clients. Very truly yours, JOHN K. STARKWEATHER. P. S.-In order to clarify this point it will be helpful if this letter and clipping could be inserted in the record. [From the New York Sun, February 10, 1939] AMERICAN CAN SELLS BONDS TO BANK The American Can Co. has sold to the First National Bank of New York $10,000,000 of 10-year, 24-percent debentures, which the bank will hold for investment. A report to that effect has been filed with the Securities and Exchange Commission. Proceeds of the issue will be used as additional working capital required by expansion of the company's business. PRIVATE SALE It can't be said that the banks are unwilling to lend money when they have a chance or that they are shy about long-term loans. The latest in private placement of a bond issue is the $10,000,000, 10-year, 24-percent debentures of American Can Co. sold to the First National Bank. It's all right for a gilt-edged company as American Can to find a private buyer of a long-term bond, but the company has transacted the business in that manner only to avoid the awful waste of money and time necessary under the Securities and Exchange Commission registrations regulations. Smaller companies and with less elevated credit waiting must still go through the Securities and Exchange Commission channels, with the result that many of them don't even try, and industry is the loser, which means that the burden of unemployment relief continues upon the Government's shoulders. It is about time that public brains came to the relief of public shoulders. MEMORANDUM IN RESPECT OF DISTRIBUTION OF CORPORATE TRUST-INDENTURE BUSINESS THROUGHOUT THE COUNTRY (Submitted by Harold V. Amberg, vice president and general counsel of the First National Bank of Chicago) It has been stated at the hearings that 70 percent of the trust-indenture business is done in New York City and another 20 percent in Chicago. This, however, is in terms of dollar volume of the bonds issued under all trust indentures. Even so, if we accept the estimate of approximately $40,000,000,000 of bonds outstanding, placing 70 percent of this total, or $28,000,000,000, in New York, and another 20 percent, or $8,000,000,000, in Chicago, that would leave a respectable $4,000,000,000 in dollar volume in cities outside of New York or Chicago. The distribution of trust-indenture business in the terms of the number of corporate trusts, under separate indentures, is, however, quite different. Apparently reliable statistics covering the whole field are not available, but the following figures in relation to the trust-indenture activities of national banks by Federal Reserve districts, as of June 30, 1938 (Seventy-sixth Annual Report of the Comptroller of the Currency, 1938, p. 12), are indicative: The figures for nonnational-bank trustees have not been compiled. It would seem that the relative distribution of the number of corporate trusts as disclosed in relation to national banks would reasonably pertain to corporate trusts under which nonnational-bank trustees are acting as trustees or at least be approximately the same. It will be noted from the above tabulation that, although in the New York Federal Reserve district the dollar volume of bond issues outstanding is over 52 percent of the total dollar volume for the country, the number of corporate trusts being executed in the New York Federal Reserve district is but 7 percent of the total number for the whole country. In the Chicago district the percentage of the total number of corporate trusts is very high and the dollar volume less. Moreover, in the New York and Chicago districts combined they have 80 percent in dollar volume and only 50 percent in number of corporate trusts, as against the whole country. In the rest of the country there is a considerable dollar volume in each Federal Reserve district, and the number of corporate trusts is significantly one-half of the total. This all indicates that the dollar volume of the respective trusts located in the New York district is very high, and that the dollar volume of trusts located elsewhere throughout the country is much smaller. The net of all this is that the trusts involving smaller dollar volume, which can the least afford the expense of negotiations in Washington, are the ones. by and large, located further away from Washington. CORPORATE FIDUCIARIES ASSOCIATION OF PHILADELPHIA, February 10, 1939. Hon. ROBERT F. WAGNER, Chairman of the Senate Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SENATOR WAGNER: I enclose herewith a copy of a resolution passed today by the Corporate Fiduciaries Association of Philadelphia concerning S. 477, now being considered by your committee. May I state that the Corporate Fiduciaries Association consists of all of the trust companies and national banks doing a fiduciary business in the city of Philadelphia. This resolution, therefore, is an expression of the attitude of the Corporate Fiduciaries of Philadelphia with respect to the Barkley bill. Very truly yours, JONATHAN M. STEERE, President. EXTRACT FROM MINUTES-RESOLUTION ADOPTED BY THE CORPORATE FIDUCIARIES ASSOCIATION OF PHILADELPHIA AT A MEETING HELD FEBRUARY 10, 1939 Upon motion duly made and seconded, the following resolution was unanimously adopted: Whereas identical bills have been introduced in the House of Representatives (H. R. 2191) and the Senate (S. 477), similar to bills introduced in the previous Congress known as a "bill to regulate the sale of certain securities in interstate and foreign commerce and through the mails and the regulation of the trust indentures under which the same are issued"; and Whereas it is the opinion of this association that the enactment of legislation such as that contemplated in the above-mentioned bills is unnecessary and inadvisable; and Whereas it is the belief of this association that the enactment of such legislation will be detrimental to the general business interests of the country for the reason that it will materially interfere with financing under corporate indentures and will substitute Federal administrative agency control over the writing of private contracts involving the raising of funds for business purposes, thus entailing increased expense to the corporation borrower; Whereas it is also the opinion of this association that the enactment of legislation of this character will have a tendency to increase greatly the volume of so-called private financing, thus taking out of the ordinary investment channel many desirable securities which would under ordinary circumstances be available for the investment of individuals and institutions; Whereas it is the belief of this association also that the enactment of these bills would place upon the banking institutions of the country undue and unfair burdens and possible liabilities not contemplated by the ordinary relationship of trustees and beneficiaries, which liabilities would impair the integrity of banking institutions and: It is hereby Resolved, That this association records its opposition to the passage of the so-called Trust Indenture Act of 1939; and it is further Resolved, That a copy of this resolution be filed with the appropriate committees of the Senate and House of Representatives with the request that it be entered in the records of the hearings of such committees. Attest: R. U. FREY, Secretary. CHAMBER OF COMMERCE OF THE UNITED STATES, Hon. ROBERT F. WAGNER, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. MY DEAR MR. CHAIRMAN: The annual meeting of the chamber in May 1938 stated its opposition to the proposals contained in the suggested Trust Indenture Act of 1939 (S. 477), the measure which is now before the subcommittee of which you are chairman. The declaration of the chamber appears in the enclosed pamphlet, which also sets out the opinions of our committee on corporate financing. The measure introduced in the present session of Congress differs so slightly from the form which was before the Senate last year that, in the opinion of our committee, all of our substantial objections still apply. You will observe that our committee believes: "The measure should be rejected by Congress as it would injure business. Its adoption would result in restrictions upon the issuance by commercial and industrial firms of bonds and other evidences of indebtedness essential for recovery and reemployment." We feel you will be interested in the full text of our committee's report. Yours sincerely, GEORGE H. DAVIS, President. THE PROPOSED TRUST INDENTURE ACT (S. 2344 AND H. R. 10292) SUMMARY OF REPORT This report upon the proposed Trust Indenture Act takes the position that: The measure should be rejected by the Congress as it would injure business. Its adoption would result in restrictions upon the issuance by commercial and industrial firms of bonds and other evidences of indebtedness essential for recovery and reemployment. The restrictions are not justified by any situation which now exists. In giving to the Securities and Exchange Commission the power and the duty to dictate many of the provisions of proposed indentures, even their precise language, the bill not only would place upon the Commission a task that no administrative commission over a period of years can properly perform with respect to the numerous indentures which are executed each year in the different States, but also would impose upon the Federal Government a responsibility which it should under no circumstances assume. This committee, as is true of the chamber, does not condone any inadequacies in trust indentures nor in maladministration connected with them. It believes, however, that any evils that fair-minded men may recognize as arising out of the present normal form of trust indentures, under which securities are issued by commercial and industrial firms, and in particular such provisions as might unduly relieve trustees of proper responsibilities, can be dealt with in a more practicable manner herein outlined. The jurisdiction over the exercise of trustee functions by banks should rest with the Board of Governors of the Federal Reserve System in the case of member banks of that system. If deemed desirable, banks which are not members of the system might be required to comply with the regulations of corporate trustee functions of member banks. If there is to be any grant of powers to the Securities and Exchange Commission to deal with trust indentures it should be limited to: (1) The require ment (by amendment to the Securities Act if it does not already give sufficient power in this respect) of adequate disclosure of the terms of indentures under which new security issues are offered for registration; and (2) the disqualification of institutions as trustees under such indentures when the institutions do not agree or are not obliged to conform to rules and regulations of the Board of Governors of the Federal Reserve System made applicable to such trusteeships. Any requirements in relation to trust indentures or to corporate trusteeships should not take a form leading to increased difficulties in the proper financing of legitimate and sound commercial or industrial enterprises nor impose burdens upon normal and proper business transactions. In any supervisory relationship to the issuance of securities under trust indentures, no agency of government should be given power that permits it, directly or indirectly, to dictate the substance of an indenture. BACKGROUND OF THE MEASURE THE TRUST INDENTURE As developed in modern corporate financing the form of trust indenture differs widely depending upon the particular circumstances of each case. In connection with secured issues one of the chief purposes of the trust indenture is to make a pledge or mortgage of assets run to a single title holder, the trustee (normally a bank or trust company), instead of directly to the constantly changing body of persons owning the bonds or other obligations that are based upon the assets. In both secured and unsecured issues the trust indenture also serves to vest in the trustee certain powers with respect to the enforcement of the rights of the security holders against the obligor, namely, the business enterprise which issues the securities under the indenture. The rights are set forth in the indenture, as are also the duties of the obligor. Securities to the amount of about $40,000,000,000 are now outstanding under such indentures. A relatively small proportion of these, a few percent, are real-estate securities. INVESTIGATION BY COMMISSION The Securities and Exchange Commission printed in 1936 a report of an investigation of trustees under indentures. In brief, the report concluded (1) that trustees under indentures should be disqualified from serving if they possess or acquire conflicts of interest inconsistent with their fiduciary obligations; and (2) that such trustees should be transformed into "active trustees" with the obligation to exercise "that degree of care and diligence which the law attaches to such high fiduciary position." COMMENT UPON COMMISSION REPORT There can be no disapproval of these general principles but the report of the Commission does not justify the delegation to it of the very broad powers provided in the Barkley-Lea bill. Aside from the instances and recital of difficulties connected with trust indentures in the "real estate" bond field, the report did not disclose any general situation of maladministration. As earlier stated, real-estate issues are an insignificant proportion of the securities outstanding under indentures. Outside of the real-estate field testimony was taken in only about half a dozen cases, in which the report criticizes the corporate trustees. In some of these cases the trustees concerned have stoutly denied the fairness or accuracy of the criticisms made in the report and have maintained that if an impartial hearing was had at which both sides of the matter could have been brought out it would appear clearly that they had properly performed their fiduciary obligations. No mention is made in the report of the many thousands of cases where the administration of such trusts has been conducted efficiently and conscientiously. The Barkley-Lea bill is an elaborate measure proposed by the Securities and Exchange Commission, which body would seek in the main to correct the situation, alleged by its report to exist, by obtaining the delegation of very broad, even dictatorial, powers to itself. |