unjustified premium and to absorb the higher costs of financing, or, on the other hand, small businesses will have to absorb the cost, which will certainly not help business. UNDERWRITERS AND TRUSTEESHIPS CONCENTRATED IN NEW YORK AND CHICAGO It will tend to concentrate underwritings, corporate trusteeships, and commercial banking business in New York and Chicago, and thus will tend to create concentration of financial control and remote control. This is contrary to the desires of the overwhelming majority of the American people and is contrary to the purposes of the Federal Reserve Act. It will concentrate the better loans among large insurance companies and banks; it will make small business pay more for its financing; it will make the investor pay an unjustified premium for the purchase of inferior securities and will tend to drive much financing from individual hands to governmental agencies. The net effect will be to place a severe restraint upon aid to business. In conclusion we feel that the bill, considered from the bird's-eye view, should not be passed; we also feel that it should not be considered from the worm's-eye view-tinkering will not help, neither will a continuation of abuse and dilemma swapping. The bill does not help business. Mr. COLE. Thank you, Mr. Miller. Mr. MILLER. Thank you. Mr. COLE. We have three more witnesses. The next is Mr. Denio of Boston. But, before you proced, I have a letter I want to file for the record at this point. It is a letter addressed to Chairman Lea in reply to his letter to the Federal Deposit Insurance Corporation with reference to the bill before us. It is dated March 28, 1939. And I also have a letter under date of March 31, 1939, addressed to Chairman Lea from the Board of Governors of the Federal Reserve System on the same subject, with a proposed amendment to the bill which the Federal Reserve Board is suggesting. (The letters referred to are as follows:) Hon. CLARENCE F. LEA, FEDERAL DEPOSIT INSURANCE CORPORATION, Chairman, Committee on Interstate and Foreign Commerce, House of Representatives, Washington, D. C. MY DEAR MR. CHAIRMAN: I am very glad to comply with your request for my opinion of H. R. 5220, March 22, 1939, the proposed trust indenture bill. We, at the Federal Deposit Insurance Corporation, are naturally much interested in a bill for the regulation of those provisions of trust indentures relative to the conduct of banks which act as trustees thereunder, for practically all of such banks are insured with this corporation. In harmony with the general policy evidenced by the Securities Act of 1933 and Securities Exchange Act of 1934, the bill under consideration undertakes to extend protection to investors by requiring that trust indentures exact from the trustee the same high standard of conduct now observed by the leaders in the corporate trust field. We believe that the bill accomplishes its aims without unduly adding to the liability of the trustee. I am, of course, aware that H. R. 5220 would, in many cases, impose some additional obligations upon banking institutions which choose to exercise the corporate trustee function. But it seems to me entirely equitable and reasonable that banks engaged in such business should accept the duties which our experience indicates must attach to that function if investors are to be safeguarded. I have been pleased to see that many bankers concur in this view. I should like to call to your attention as well that the banks are interested in this bill not only as indenture trustees but as investors in corporate securities. Insured commercial banks hold some $3,000,000.000 of corporate issues. The strengthening and clarification of the position of the bondholder contemplated by this bill would accordingly be of great value to the banking system. Opposition has been raised to the section of the bill which requires trustees to file with the Securities and Exchange Commission copies of their periodic reports to bondholders, and to the fact that banks and trust companies are not excluded from the operation of the provisions empowering the Commission to make such investigations as are necessary for the proper administration of the operative features of the bill. The ground for this objection is the allegation that those sections will create "duplication" in the supervision of banks. This objection, I believe, is ill-founded. As to periodic reports, the Commission is given no power to prescribe their contents; the only requirement is that copies thereof be filed with the Commission. With respect to the Commission's investigatory power, it is to be noted that the information upon which action under this bill must be predicated will only in rare cases be available from the reports and examinations in the hands of the bank supervisory agencies. To impose the duty of gathering this information upon the supervisory agencies would unnecessarily burden them and impede the Securities and Exchange Commission in the performance of its functions, without in any way relieving the banks. I think it very important that banks which voluntarily assume the trust function should not, any more than a private individual, be exempted from such investigation as may be necessary for the enforcement of the provisions of the bill, merely because they are already supervised in a quite different capacity. Certainly the Securities and Exchange Commission is the agency best fitted to administer a law on this subject. Generally speaking, administration would consist solely of studying the trust indentures to ascertain whether they conformed with the act. Since the Securities and Exchange Commission now examines the trust indentures in connection with the registration of securities, little additional work would be involved, and no difficulty of coordination of activities would arise. If the administration of the law were placed in the hands of one of the bank supervisory agencies, duplication of function would result. If the bank supervisors were required to secure information for the Securities and Exchange Commission at its request, cumbersome difficulties of coordination would arise. The attention of the bank supervisory agencies would be diverted from their prime functions. However, it is quite proper that the bank supervisory agencies should supply the Securities and Exchange Commission with any information which they do have available, which will be found useful in the administration of this act. In my opinion, the passage of this bill would have a beneficial effect in promoting the financing of business. The confidence of investors would be promoted, and consequently the flow of funds into investment channels would be encouraged. Sincerely yours, LEO T. CROWLEY, Chairman. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Washington, March 31, 1939. Hon. CLARENCE F. LEA, Chairman, Committee on Interstate and Foreign Commerce. House of Representatives, Washington, D. C. DEAR MR LEA: This is in response to your request of March 23, 1939, for a report by the Board of Governors of the Federal Reserve System on the bill H. R. 5220, relating to the regulation of trust indentures under which certain securities are issued and sold in interstate and foreign commerce and through the mails. The provisions of the bill H. R. 5220 appear in general and fundamentally to be the same as those contained in confidential committee print No. 2 of February 21, 1939, of the bill S. 477. The Board has heretofore submitted its views to the Banking and Currency Committee of the Senate with respect to the provisions of the bill S. 477 in two letters, dated February 16, 1939, and March 4, 1939; and the views expressed herein conform to the views expressed to the Banking and Currency Committee of the Senate in those two letters. The Board recognizes that there have existed in the past abuses in connection with corporate trust indentures which this bill is designed to remedy, and that the interest of investors would be better served if the responsibilities of corporate trustees were more clearly defined, if they were required to exercise a greater degree of diligence than has been exercised at times in the past, and if they were not permitted to occupy positions conflicting with their fiduciary responsibility. In attempting to provide a remedy, however, the bill sets up certain administrative requirements and imposes upon the corporate trustee certain additional obligations which might increase the difficulties and expense of obtaining needed capital for business enterprises. It might also cause corporate trustees in times of stress to take action resulting in liquidations that would be unnecessary or undesirable from the standpoint of the public interest. The question may well be considered whether there is pressing need at this time for additional legislation of this character. Congress has vested in the Government broad powers designed to protect investors. It is important that the protective results hoped for from this additional legislation be weighed against its restrictive effects upon the capital markets. The decision should be heavily influenced by consideration of the course that will be most helpful at this stage of economic recovery. The Board has weighed the problem and is of the opinion that action should be postponed until further study can be made by Congress of the financial field of which this bill touches only a part. If. however, the committee is satisfied that there does exist at this time a need for some additional legislative action in order to prevent a recurrence of the abuses in this field which occurred under indentures drawn prior to the enactment of the Security Act of 1933, the Board wishes to raise the question whether the bill could not be made less of a deterrent to capital financing and at the same time be improved materially from the standpoint of its effect upon the issuance and servicing of trust indentures, by writing into the law itself, in simpler terms, the standard of conduct which ought to be observed by every corporate trustee and by eliminating any administrative procedure which is not already necessary in connection with applications for registration under the Securities Act. With the exception of the matters hereinafter discussed relating to the avoidance of unnecessary duplication of supervision of banks, the Board wishes to make it clear that it believes that, if any additional administrative authority is considered necessary by Congress to carry out the proposed legislation, it should be conferred on the Securities and Exchange Commission. With respect to the avoidance of any unnecessary duplication of supervision of banks, there is enclosed herewith for the consideration of your committee a draft of certain proposed amendments to the bill H. R. 5220 which the Board believes should be incorporated in the bill. 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 amendments, 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 Commission 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 to the Commission under the provisions of the bill as amended by the proposed amendments enclosed herewith. Very truly yours, L. P. BETHEA, Assistant Secretary. AMENDMENT TO H. R. 5220 On page 55, line 25, before the comma following the word "authorized," insert the words "and directed." Strike out everything commencing with line 8, on page 57, through and including line 2, on page 58, and substitute the following: "(c) 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, March 23, 1939. Hon. CLARENCE F. LEA, House of Representatives, Washington, D. C. DEAR MR. LEA: In connection with the bill (H. R. 5220) to provide for the regulation of the sale of certain securities in interstate and foreign commerce and through the mails and the regulation of trust indentures under which the same are issued, which has been referred to your committee, the Federal Advisory Council has requested the Board to transmit to your committee the enclosed memorandum for the purpose of having it placed in the record of any hearings which your committee may hold on such bill. This memorandum is a copy of a memorandum on Senate bill S. 477, which was filed with the Banking and Currency Committee of the Senate at the request of the Federal Advisory Council. Very truly yours, L. P. BETHEA, Assistant 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 accepting 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 of the Senate Committee on Banking and Currency, in the absence of further hearings, will be closed on February 16, and therefore requests that it be forwarded by that date. Mr. L. P. BETHEA, MARCH 31, 1939. Assistant Secretary, Board of Governors, Federal Reserve System, Washington, D. C. DEAR MR. BETHEA: In response to your letter of the 23d instant, which was addressed to the Honorable Clarence F. Lea, chairman, which letter was handed to me as chairman of the subcommittee in charge of H. R. 5220, I am wondering, after reading the memorandum submitted by the Federal Advisory Council, whether they had 5220 before them at the time the recommendations were drafted. As you may not know, H. R. 5220 was introduced subsequent to S. 477. In view of the fact that hearings on H. R. 5220 are to be held next week, April 4, 5, and 6, I will appreciate it if you will have the Federal Advisory Council prepare any recommendations they care to, addressed strictly to H. R. 5220, and have such recommendations in my hands by Tuesday morning if possible. Very sincerely yours, WILLIAM P. COLE, Jr. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Hon. WILLIAM P. COLE, Jr., Washington, D. C. DEAR MR. COLE: Referring further to your letter of March 31, 1939, there is transmitted herewith, at the request of the executive committee of the Federal Advisory Council, a self-explanatory letter dated April 3, 1939, from the secretary of the council, expressing the views of the council's executive committee with respect to the trust indenture bill H. R. 5220. You will understand, of course, that the Board of Governors in transmitting the enclosed letter is not thereby expressing any views or opinions of its own with regard to the bill. Very truly yours, Mr. CHESTER MORRILL, L. P. BETHEA, Assistant Secretary. FEDERAL ADVISORY COUNCIL, Secretary, Board of Governors of the Federal Reserve System, Washington, D. C. DEAR MR. MORRILL: Reference is made to the wire sent to Messrs. Walter W. Smith, Howard A. Loeb, and myself by Mr. Bethea quoting a letter from the Honorable William P. Cole, Jr., chairman of a subcommittee of the Interstate and Foreign Commerce Committee of the House of Representatives, having in charge House bill 5220. The Federal Advisory Council made the recommendation shown below in regard to Senate bill 477, relating to corporate trusteeships, and this recommendation was transmitted by the Board of Governors of the Federal Reserve System to the chairman of the Senate Committee on Banking and Currency on February 14, 1939. On March 22, 1939, a redraft of Senate bill 477 was introduced in the House of Representatives as H. R. 5220 and was referred to the Committee on Interstate and Foreign Commerce. The members of the executive committee of the Federal Advisory Council felt and feel after examining H. R. 5220 that the council's objections to the provisions of Senate bill 477 apply with equal force to H. R. 5220. The recommendation made in respect to Senate bill 477 reads as follows: "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 accepting 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 |