He may exercise his right to declare the bonds in default or the right to put the company into bankruptcy; or the right to sell the property. Now the bill provides that in the case of default you have got to exercise some of these things. Mr. COLE. In the case of default, as defined in the indenture? Mr. COLE. But, if the same definitions were allowable in the future, would that not give you power to act in the way you did with those two companies? There is no reason why it would have to be exercised otherwise under these provisions. Mr. CANRIGHT. Let me see if I can make this clear. There was a default under our indenture. Failure to provide sinking fund constituted a default, and it would be a very silly indenture that did not make failure to provide for the sinking fund, a default. It was a default under the indenture, but the difference between the indenture that we were operating under and the one that we would be operating under if this bill were passed is this: Our indenture provided that we could exercise our discretion. We did not have to take action. We did not have to exercise any of these powers in case of default, unless the bondholders requested us to do so. Under this bill the indenture must require us to take action. WHO WRITES INDENTURE Mr. REECE. Who writes the indenture contract? Mr. CANRIGHT. You were not here at the beginning of the session this morning, Mr. Reece, I believe. In the first place, the company and the underwriter get together to negotiate in a general way the terms of the loan and then after that is done, the attorneys for the underwriter frequently, particularly in these larger issues that we are talking about, the attorneys for the underwriter or it may be, the company will draw the first draft of the indenture. If the attorneys for the company draw it, it is submitted to the attorneys for the underwriter and they go over it very carefully to see what additional provisions they want added to it, for the protection of the bondholders, and it is also submitted to the trustee at about the same time, and the trustee goes over it. Every word is read by the trustee when it goes over the thing, so as to see that the indenture is the kind of an indenture it should be. The trustee does not have the same broad powers as the underwriter has in dictating the terms of the indenture; but it does want to know that the bondholders are reasonably protected. The underwriter is going to dictate certain definite things that the company must do to protect the bondholders. Mr. REECE. But, so far as writing the contract is concerned, it is done by the issuer and the underwriter. Mr. CANRIGHT. Together with the trustee. Mr. REECE. Well, the prospective trustee, after discussing the contract, can express a view with reference to certain provisions; but if the issuer and the underwriter are not in agreement with the trustee they can go to some other place, across the street, to some other prospective trustee and negotiate with him to become the trustee, and so on. What I have in mind primarily is that under our present set-up, without expressing any opinion myself as to whether the interests of the prospective purchasers have been provided for, there is no one present in the writing of the contract, so to speak, who is responsible to or presumed to take care of the interests of the people who are to buy the bonds. Mr. CANRIGHT. Why, most assuredly. The underwriter has every reason to do that. There is not any reason why he should not do it, and there is every reason why he should. As a matter of fact, the bondholders have expert services in preparing the provisions in indentures for their protection, for which the borrowing company pays. Mr. REECE. But the underwriter is employed by the issuer. Mr. CANRIGHT. No; it is just a contract. Mr. REECE. I mean, whatever relationship he might have is an arrangement which is made by the issuer and not by the bondholders. Mr. CANRIGHT. Let me see if I can clear that up a little bit. An issuer wants to borrow money and it may say to a half a dozen different underwriters that they want to borrow the money. They want to know how much interest they are going to have to pay and a number of other details, and then the issuer and the underwriter get together to write up a contract. The issuer is, of course, interested in seeing that it does not go further than it should go; that it does not obligate itself to do something that it cannot do. The underwriter is interested only in one thing, and that is that the bondholders be protected so that he affords to them every chance. against loss that he can, and not do undue harm to the company. Mr. REECE. If there is a conflict of interest between them, in the case of the trustee, under the present arrangement, who is there who has the authority or the responsibility to see that the conflict of interest is removed? Mr. CANRIGHT. The Federal Reserve Board, in case of national banks; possibly in the case of State member banks; the banking commissioners of the State banks in case of the few State banks that are not members of the Federal Reserve. Mr. REECE. Has that authority been exercised? Mr. CANRIGHT. No; it has not. As I was saying, they did not give the attention they might have to these trusts-I am not blaming the Federal Reserve Board-until this thing came about, until after the Securities Exchange Commission made its investigation, and I think that it was a desirable thing that the investigation was made. I am not criticizing the Securities Exchange Commission. They drew a lot of fanciful conclusions; but nevertheless their investigation was a good thing. Until that time the Federal Reserve Board, at least in our bank, had never examined it to see how we were conducting our corporate trust work. They are doing it today. And remember today a trustee has not any right to have a conflicting interest. If a bondholder loses money because the trustee did have a conflicting interest, the bondholder is entitled to recover and there is not anything in the present indenture which would prevent him; and in that respect there is no new obligation placed on the trustee by this bill. You are just taking power away from it. You are taking away the right to exercise discretion. I thank you, Mr. Chairman. Mr. COLE. Thank you, Mr. Canright. STATEMENT OF RICHARD S. DOUGLAS, ASSISTANT COUNSEL FOR THE CLEVELAND TRUST CO., CLEVELAND, OHIO Mr. COLE. We will hear Mr. Douglas. Will you state your full name and whom you represent. Mr. DOUGLAS. My name is Richard S. Douglas. I am assistant counsel for the Cleveland Trust Co. I wish to read a very short statement from the Central National Bank of Cleveland, the Cleveland Trust Co., and the National City Bank of Cleveland, which comprises all of the trustee banks of Cleveland which are in the pursuit of this sort of business. (Thereupon Mr. Douglas read as follows:) The Honorable WILLIAM P. COLE, Jr., CLEVELAND, ОнIO, April 3, 1939. Chairman, Subcommittee of the House Committee on Interstate and Foreign Commerce, Washington, D. C. DEAR SIR: The undersigned understand that on April 4, 1939, your subcommittee will begin hearings on H. R. 5220, introduced in the House of Representatives March 22, 1939. Since each of the undersigned has been acting in the capacity of corporate trustee under numerous indentures for many years, it is felt that a declaration of our views regarding this bill may be of help to your committee. We believe it is very unwise to consider the passage of this legislation at this time when renewed activity in the capital markets can largely assist in general recovery, because the legislation will inevitably have a chilling effect upon new capital issues through the addition of new machinery and the raising of uncertainties as to the nature and extent of added obligations placed upon obligors, underwriters, and trustees. The same effect will follow from the necessary additional legal and administrative expense which the legislation will involve both initially and throughout the life of the trust indenture. Particularly from the standpoint of Cleveland and Ohio the burden of this additional legislation is likely to fall most heavily on issues of relatively small amounts, such as might be expected to be issued and sold in the Ohio territory. Any additional expense necessarily raises the minimum amount of any security issue which must absorb, not only the expense of direct issuance and marketing, but the expense of conforming to the Securities and Exchange Commission Act, the State Blue Sky Act, and other tax and regulatory provisions. It seems obvious that the result will be measurably to increase the difficulties of the smaller industrial concerns seeking long-term capital. It is our considered judgment that the bill inflicts upon indenture trustees heavy and unnecessary burdens and subjects them to serious hazards as well as very substantial expense so much so that there is an indication of considerable hesitancy on the part of a number of trust companies in Ohio to accept indenture trusteeships if this bill is passed. To the extent that determinations such as this are made, the necessary result would be further to centralize this trust business in the larger centers of the country. We do not attempt to discuss in detail various undesirable provisions of the bill. It might be added, however, that the bill would subject trust companies to the control of another Governmental agency in addition to the Federal Reserve Board, the Federal Deposit Insurance Company and the State and Federal Banking Authorities. Moreover, in this instance the agency will be attempting to participate in the drafting of the indenture agreement pertaining to every substantial security issue in the United States. It seems obvious that aside from the serious paternalistic consequence of such a program, no agency can be sufficiently informed on all phases of industrial activity to be qualified to exercise such supervision. May we request that a copy of this letter be included in the record of the hearings before your committee. Respectfully submitted. CENTRAL NATIONAL BANK OF CLEVELAND, H. R. HARRIS, Vice President. THE NATIONAL CITY BANK OF CLEVELAND, Mr. DOUGLAS. I have a very brief resolution, Mr. Chariman, which is shorter than this first paper I read, from the Clearing House Association of Cleveland, also a letter from the President of the City National Bank & Trust Co. of Columbus, Ohio. (The resolution referred to is as follows:) RESOLUTION The following resolution regarding H. R. 5220 now pending in Congress was approved by all of the members of the Cleveland Clearing House Association, April 3, 1939: Resolved, That the Cleveland Clearing House Association, Cleveland, Ohio, desires to go on record in opposition to H. R. 5220 because it believes such legisation to be unnecessary, productive of heavy expense, and an obstacle to new financing on which recovery so largely depends; "Resolved, That we regard this proposed legislation as tending to an undesirable concentration of trust indenture business in the larger centers, to the injury of Ohio trust companies; "Resolved further, That this resolution be transmitted to the Honorable William P. Cole, Jr., with the request that it be entered in the record in the hearings on said H. R. 5220." I hereby certify that the above is a true and correct copy of the resolution above described. A. C. HOFFMEYER, CLEVELAND, OHIO. (The letter is as follows:) APRIL 5, 1939. Re: H. R. 5220, providing for the regulation of sale of certain securities and of trust indentures under which same are issued. Hon. WILLIAM P. COLE, JR., Chairman, Subcommittee of the House Committee on Interstate and Foreign Commerce, Washington, D. C. DEAR SIR: Expressing the views of a bank operating a trust department, located in a moderate-sized city, we believe that the provisions of the above bill will produce results on trust department operations and financing in communities of this size which are detrimental and which have not been contemplated by its sponsors. With the recognized need existing at the present time for private financing in order to reduce unemployment, and the expressed intention of the various governmental lending agencies to afford means of financing for the smaller businesses, it seems to us that the effect of this bill as a whole would be to surround such contemplated financing with additional expense and burdens which would act as a deterrent to considerable private financing which might, otherwise, be effected. While a large proportion of the issues which are normally floated in a community of this size are less than the statutory amount ($1,000,000) which may be exempted by the Commission, nevertheless, there results both delay and added expense to the borrower by reason of the required Commission approval in order to obtain such exemption. Without attempting to discuss the bill's provisions in detail, may we point out that in communities much smaller than Columbus are located numerous industries which require financing and whose volume of business and individual success considered throughout the United States are material factors in the prosperity of our country. The increased expense of financing and fees required by the provisions of this bill would fall proportionately heavier on businesses of this type than on the extremely large issuer. Furthermore, assuming that an issue has been floated and the initial expense has been borne, we submit that the definitions in the proposed bill regarding interlocking of directorates and conflict of interests of a trustee are so stringent as to be practically unworkable and prohibitive in smaller communities where, as is generally the case, a comparatively small group of men are collectively interested in most of the industry and financing of the town. If a conflict of interest on the part of a director and underwriter or a trustee actually exists resulting in damage, there is and has been adequate remedy in existing law for redress. Should it be felt that control is necessary along the lines proposed in the above bill, could it not be obtained more effectively through an amendment to the Securities Exchange Act which would result in flexibility by regulation to meet conditions as they arise from time to time? We are of the opinion that enactment of this bill will result in the concentration of corporate indenture trusteeships in the larger financial centers to the detriment of both the issuer and corporate trustees elsewhere located. We request that this communication be incorporated in the printed report of the hearings on this bill. Respectfully, COLUMBUS, OHIO. THE CITY NATIONAL BANK TRUST CO., Mr. DOUGLAS. Now, Mr. Chairman, I just want to say in one sentence or two, in closing, that I have been connected with my institution since 1920, during which time millions of dollars in these issues have been brought out, and that until this matter arose down here in Washington, I never heard it even suggested that the form of the trust indenture under which indenture trustees were operating was in any way related to any losses that investors may have suffered or that losses were in any way due to the provisions of the trust indenture. I want to leave this word with the committee in closing: That the impression which seems to have gone around that the interests of the bondholders are somehow thrown to the wolves when these indentures are entered into. It is absolutely erroneous, because I know of no issue, gentlemen, where we have acted as trustee in which some of our customers were not almost sure to become bondholders, and we do not dare relax vigilance either in the drafting of the provisions of these trust indentures, or in the way they are administered afterward, because our own people are almost always absolutely sure to be among the bondholders. Mr. COLE. Mr. Douglas, then, you are opposed to the bill in its entirety; or, I will ask that question this way. Assuming that there will be some legislation on the subject, are you prepared to suggest any amendment to this bill? Mr. DOUGLAS. We are opposed to the theory of this bill, Mr. Chairman. Our feeling is this: if it can be shown that losses which have happened in this great catastrophe we have been through are in fact traceable to defects in the indentures-and I have seen no evidence to that effect, Mr. Chairman-but if that be true, a few simple rules of law might be written into our statute books, or better still, the control of these matters might be put more directly in the Federal Reserve Board; but the theory of this bill gets away from the disclosure theory and really sets up down here a vast agency for the practice of law we are therefore opposed to it. And, we feel that if the theory of this bill is to be adhered to, we could not suggest any amendment that would do away with the objections that we suggest as long as this theory prevails. I know of no trust company in Ohio which is in favor of this bill. That is all, Mr. Chairman. Mr. COLE. Thank you, sir. We will hear Mr. Anderson, but before you start, Mr. Anderson, Mr. Helffrich has a very short statement. If it is agreeable to you we will hear him first. Mr. ANDERSON. Yes, Mr. Chairman. |