committee. We would like to conclude at the noon hour if possible. Mr. Mapes is anxious to return and ask some questions.

So far as I am concerned, I am going to yield my time to him. Mr. REECE. Anticipating that procedure, if you will pardon me, I am wondering if Mr. Burke would like to have this analysis of the bill, section by section, printed in the record, although he might not refer to all of it in his discussion.

Mr. BURKE. I would be very happy to have that done, sir.

Mr. COLE. Right at this point?

Mr. BURKE. Yes, sir.

Mr. COLE. That will be done.

(The analysis referred to is as follows:)

SECTION 301. SHORT TITLE

The bill adds a new title to the act approved May 27, 1933, of which the Securities Act of 1933 constitutes title I. The new title, title III, is given the short title of the Trust Indenture Act of 1939.

SECTION 302. NECESSITY FOR REGULATION

Subsection (a) contains an enumeration of the conditions which necessitate Federal regulation, in the interests of investors and in the national public interest, of public offerings of notes, bonds, debentures, and evidences of indebtedness, through the use of means and instruments of transportation and .communication in interstate commerce and of the mails.

(1) This paragraph emphasizes the necessity of having a trustee to represent the interests of bondholders. Reference is made to the obvious impracticability of individual action by bondholders, and to the fact that concerted action is impeded by reason of the unavailability to them of bondholders' lists. (2) This paragraph refers to the necessity that the trustee have adequate rights and powers and adequate duties and responsibilities with respect to the protection and enforcement of the rights of the bondholders. It also refers to the general and reasonable assumption by investors that the trustee is under an affirmative duty to take action for the protection and enforcement of their rights, an assumption which is incorrect under the forms of trust indenture in common use.

(3) This paragraph mentions the necessity that the trustee have resources commensurate with its responsibilities, and that it not have any conflicting relationship to, connection with, or interest in the obligor or any underwriter of its securities.

(4) This paragraph has reference to the fact that trust indentures generally fail to require the obligor to furnish to the trustee and to the bondholders adequate current information with respect to its financial condition and the performance of its obligations under the indenture, and fail to provide machinery for the transmission of such information to the bondholders.

(5) This paragraph refers to indenture provisions which are misleading or deceptive, and to the necessity of full and fair disclosure of the effect of indenture provisions with respect to the definition of what shall constitute a default under the indenture, or the release and substitution of property subject to the lien thereof, or the issuance of additional securities.

(6) This paragraph answers the natural question why bondholders have not taken steps to protect themselves by insisting upon the inclusion of adequate protective provisions in indentures. The explanation is that trust indentures are commonly prepared by the obligor or underwriter, and the fact that the securities are publicly offered (the very fact which brings them within the scope of this bill), would make bondholder participation in the drafting process impracticable, even if they understood the problem.

Subsection (b) states that abuses of the foregoing character have been so widespread that, unless regulated, the public offering of such securities, in interstate commerce or through the mails, is injurious to the capital markets. to investors, and to the general public. This subsection also declares the general policy of the bill to be to meet these problems and eliminate these evils.

SECTION 303. DEFINITIONS

An application for the "qualification" of the indenture under which securities are to be issued will, with few exceptions, be accompanied by registration of the securities themselves under the Securities Act, and so far as possible the procedure under that act is to be followed. Accordingly, paragraph (1) of this section provides that any term defined in section 2 of the Securities Act, as heretofore amended, and not otherwise defined in this section, shall have the meaning assigned to such term in such section 2. Thus the Securities Act definition of "security" and "issuer," among others, are carried over into the bill.

In addition, section 303 of the bill contains definitions of 17 terms used throughout the bill, such as sale, prospectus, underwriter, director, executive officer, indenture, and voting security.

"Sale" (2) is defined in the same terms as in section 2 (3) of the Securities Act, with the exception mentioned in the latter part of the paragraph. The reason for this exception can best be illustrated by an example. If, as is not an uncommon practice in the case of real-estate mortgages, the mortgagor executes an ordinary bond and mortgage to a trust company, receiving in exchange "certificates of participation" in such mortgage which he then sells to the public, this transaction is held, under the Securities Act, to involve a public offering not only of the certificates, but of the underlying bond. But for the exception made in this paragraph, it would be necessary that the underlying bond, as well as the certificate of participation, be issued under a qualified trust indenture. The exception does not apply if the eventual distribution of the underlying bond or bonds to the purchasers of the certificates is contemplated, as where the certificates are by their terms convertible into such bonds. In such cases the sale of a certificate of interest or participation is deemed an immediate sale of the underlying bond or bonds even though the conversion privilege is not exercisable until some future date.

"Prospectus" (3) is defined in the same terms as the Securities Act, section 2 (10) of which defines "prospectus" broadly as including any written or radio communication offering a security for sale. By virtue of this definition, communications of this character must conform to the requirements of section 318 with respect to analyses of the effect of indenture provisions relating to the definitions of "default," to releases and substitutions, and to the issuance of additional securities under the indenture. In the case of unregistered securities, this paragraph provides two exceptions (comparable to those provided in section 2 (10) of the Securities Act), the effect of which is to exempt from such requirements (1) communications accompanying a written statement which contains such analyses, and communications sent subsequently to the sending of such a written statement, and (2) the ordinary type of broker and dealer advertising, provided that it states from whom such a written statement may be obtained. "Underwriter" (4) is defined in exactly the same terms as in section 2 (11) of the Securities Act except that the last sentence of the Securities Act definition is omitted. Under that sentence, a person who undertakes the distribution of a block of outstanding securities for a person in a control relationship with the issuer, or who purchases from such a controlling or controlled person with a view to distribution, is held to be an underwriter just as though he were distributing for or had purchased from the issuer itself, and registration by the issuer is required. The considerations which justify requiring regstraton by the issuer in this situation do not, however, extend to requiring qualification of the indenture before such a distribution may be made. The elimination of the sentence in question will not give rise to any danger of evasion of the provisions of this bill, since the term "underwriter," as defined in this bill, would clearly be broad enough to cover any person, whether or not in a control relation with the issuer, who, as part of a scheme for public distribution, purchased from the issuer securities issued under an indenture which was not qualified under this bill. For the purposes of the last clause of this paragraph, a "spread" of which a person is given the benefit is to be considered as in the nature of a "commission" to such person, as under the Securities Act definition.

"Director" (5) is defined in substantially the same terms as in section 3 (a) (7) of the Securities Exchange Act of 1934.

"Indenture" (7) means any mortgage, deed of trust, trust or any other indenture or similar instrument or agreement, whether or not secured, under which securities are outstanding or are to be issued. The term includes any supplement or amendment to any of the foregoing.

“Indenture to be qualified” (9) means the indenture in respect of which a particular application is filed, and the next four terms are defined with reference to that indenture. Through this device the language of sections 310 to 317, inclusive, has been considerably simplified.

“Indenture trustee" (10) means each trustee under the indenture to be qualified and each successor trustee.

“Indenture security" (11) means any security issued or issuable under the indenture to be qualified.

"Obligor" (12) means every person who is liable upon a security issued or issuable under the indenture to be qualified. In the case of certificates of interest or participation, the term includes persons liable upon the security or securities in which such certificate evidences an interest or participation. This provision is of particular importance in connection with the prohibitions against conflicting interests, for in the case of such certificates it is the indenture trustee's interest in or connection with the obligor upon the underlying security which really matters. The last clause of the paragraph is intended to make clear that the trustee under equipment trust certificates or certificates of interest or participation is not itself to be regarded as an abligor, merely by reason of the fact that it agrees to pay over to the certificate holders moneys received from the lessee of the equipment or from the obligor on the underlying security or securities.

"Voting security" (16) is defined in substantially the same terms as in section 2 (a) (17) of the Public Utility Holding Co. Act of 1935. The test is the right to vote in the direction or management of the affairs of the "person" in question. The definition makes clear that the expression "percentage of the voting securities" has reference to the voting power, and not to the number of shares.

"Securities Act of 1933" (17) is to be deemed to refer to such act, as heretofore or hereafter amended. Where, in various portions of the bill, the intention is to incorporate provisions of the Securities Act as they now stand, regardless of future amendments, specific reference is made to the Securities Act of 1933 "as heretofore amended." The purpose is to prevent the inadvertent dislocation of the provisions of this bill by reason of future amendments of the Securities Act. A similar provision is made with respect to the "Securities Exchange Act of 1934" and the "Public Utility Holding Co. Act of 1935."

SECTION 304. EXEMPTED SECURITIES AND TRANSACTIONS

Subsection (a) exempts certain securities from the provisions of sections 305, 306, 323, 324, and 325 of the bill.

(1) This is the provision which limits the applicability of the bill to notes, bonds, debentures or evidences of indebtedness, or certificates of interest or participation in, temporary certificates for, or guarantees of any of the foregoing. The specific mention of these types of security, and the failure to mention other types specifically mentioned in the definition of the term "security" contained in section 2 (1) of the Securities Act and incorporated by reference in this bill (such as interim certificates and certificates of deposit), makes clear that such other types of security are exempted from the provisions of this bill. On principle, certificates of interest or participation of the character referred to in the discussion of section 303 (2) of the bill, should be subject to the provisions of the bill. Practical considerations also demand their inclusion, for adoption of the certificate of interest device would provide too easy a method of avoiding the requirements of the bill.

(2) This paragraph in effect limits the type of "certificate of interest or participation" to which the bill applies to the general type of certificate referred to in the discussion of section 303 (2). It would exempt, for example, fixed trust certificates evidencing an interest in a group of assorted bonds.

(3) Under this paragraph the qualification requirements of the bill are to become effective 6 months after its enactment. A similar device was used in section 3 (a) (1) of the Securities Act.

(4) The effect of this paragraph is to exempt from the provisions of this bill all securities exempted from registration under the Securities Act with the two exceptions noted below. The category thus exempted includes governments and municipals, securities of national or State banks, short-term commercial paper, securities of eleemosynary institutions and building and loan associations, rails, receivers' certificates and insurance policies.

The two exceptions are securities issued in exchange for other securities of the same issuer, and securities issued under a plan approved by a court, which

are exempted from the Securities Act by sections 3 (a) (9) and 3 (a) (10) thereof. It may be reasonable to suppose, for the purposes of exemption from the disclosure requirements of the Securities Act, that one who already holds securities of a company which are to be exchanged for new securities is reasonably familiar with its affairs, but there is no reason why the indenture under which the new securities are issued should not conform to the higher standards prescribed by this bill. With respect to the failure to carry over the section 3 (a) (10) exemption, it should be noted that while courts may pass on the fairness of the reorganization plan under which securities are issued, they do not commonly examine the trust indenture.

The distinction thus taken indicates why, in this paragraph, reference is made to the Securities Act of 1933, as heretofore amended. It is quite possible that future amendments of the Securities Act will exempt from the operation of that act securities which, for similar reasons, are not entitled on principle to an exemption from this bill.

Although securities "issued by" National or State banks are exempted from this bill, it would not be possible for an issuer to evade compliance with this bill by making a bond and mortgage to such a bank, and then causing the bank to "issue" certificates of interest or participation in such bond and mortgage. Similar questions have arisen under the Securities Act, and under such circumstances the company itself, rather than the bank which performs purely ministerial functions, has been regarded by the Commission as the "issuer" of the certificates of participation. Such administrative interpretations of the Securities Act would, of course, be controlling in the interpretation of this paragraph.

(5) The first clause of this paragraph exempts securities issued under a mortgage indenture as to which a contract of insurance under the National Housing Act is in effect. Under that act, the Federal Housing Administration has control over the form of such mortgage indentures, and the application of this bill to such securities would result in an unnecessary duplication of regulatory machinery. The second clause of this paragraph gives such securities the same status, with respect to the Securities Act, as securities which are guaranteed by the United States. Under the 1938 amendments of the National Housing Act, the trustee under a mortgage indenture which is guaranteed by the Federal Housing Administration has, in the event of a monetary default, the option of assigning the mortgage to the Federal Housing Administrator in exchange for debentures, guaranteed by the United States, for 98 percent in principal amount of the bonds outstanding under the indenture, together with a certificate of claim entitling him, among other things, to receive the other 2 percent out of any surplus remaining upon the foreclosure of the indenture. (6) This paragraph exempts obligations of foreign governments and subdivisions. Substantially different considerations apply to such issues.

(7) This paragraph exempts any guarantee of any security exempted from the provisions of this bill by subsection (a). If it is not necessary to comply with the indenture requirements with respect to the security itself, there would be little point in making such requirements applicable to a guarantee of such security.

(8) In the bill as reported by the Securities and Exchange Subcommittee of the Senate Banking and Currency Committee, a new paragraph (8) has been added to this subsection in substitution for subsection (c). A similar amendment is to be proposed to H. R. 5220. The new paragraph exempts any securities issued otherwise than under an indenture, or issued under an indenture which limits the aggregate principal amount of securities outstanding thereunder to $1,000,000 or less, but in the case of securities of the same issuer to which section 305 would otherwise have been applicable, the maximum aggregate principal amount of such securities to which this exemption may be applied in any period of 12 consecutive months is limited to $1,000,000.

Subsection (b) in effect restricts the applicability of the bill to public offering by issuers or underwriters, as under the Securities Act itself, transactions by dealers being covered only to the limited extent deemed reasonably necessary to prevent evasions. As has already been noted the term "underwriter" is more narrowly defined under this bill than under the Securities Act. The last sentence of this subsection is necessary in order to prevent persons who would be "underwriters" under the broader Securities Act definition from losing the exemption provided by this subsection. Here again the reference is to the Securities Act of 1933, as heretofore amended.

Subsection (c): In the bill as reported by the Securities and Exchange Subcommittee of the Senate Banking and Currency Committee, this subsection is omitted, and in lieu thereof paragraph (8) has been added to subsection (a) of this section, in order to eliminate the element of "administration" in connection with this exemption. A similar amendment is to be proposed to H. R. 5220. The former subsections (d) and (e) are, of course, to be redesignated "(c)" and "(d)", respectively.

Subsection (d): This subsection permits the issuer to apply for the exemption of offerings of additional securities issued under trust indentures which were executed prior to the effective date of the qualification requirements. On such application, the Commission is required to grant an exemption with respect to any provisions of the bill as to which the Commission finds, after hearing, that compliance with such provisions, through the excution of a supplemental indenture or otherwise, would require the consent of the 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 interests of investors. It will 'be noticed that compliance with many of the provisions of the bill could not conceivably be regarded as necessitating the consent of the holders of outstanding securities, and the necessary basis of Federal jurisdiction existing, there is no reason why the issuer should not be made to comply to that extent with the required standards, particularly in view of the safeguard provided by paragraph (2) of this subsection.

Subsection (e): Under this subsection the Commission is authorized, on application by the issuer and after opportunity for hearing thereon, to exempt from any one or more of the provisions of the bill securities issued by a "person" organized and existing under the laws of a foreign government or political subdivision, to the extent that the Commission finds that compliance with such provisions is not necessary in the public interest or for the protection of investors.

SECTION 305. PROHIBITIONS RELATING TO INTERSTATE COMMERCE AND THE MAILS

Subsection (a) in effect requires that all securities, the public offering of which is subject to the bill, be issued under an indenture as to which "qualiflcation" is effective. It prohibits, in language substantially similar to that of section 5 of the Securities Act, the use of means or instruments of transportation or communication in interstate commerce or of the mails to sell any such securities or to deliver the same after sale unless they have been or are to be issued under a qualified indenture.

Subsection (b) applies only to securities which are not registered under the Securities Act, but which have been or are to be issued under a qualified indenture. The application of this subsection is thus limited to securities issued in exchange for other securities of the same issuer, and securities issued under a plan approved by a court, which are exempted from the registration and prospectus requirements of the Securities Act by sections 3 (a) (9) and 3 (a) (10) thereof. Subject to the exemptions allowed by section 304, this subsection, which is modeled on section 5 (b) of the Securities Act, makes it unlawful for any person to make use of the mails or any means or instruments of interstate or foreign commerce to transmit any prospectus relating to the sale of any such security issued under or by analyses of the effect of any indenture provisions relating to the definition of default, to releases and substitutions and to the issuance of additional securities under the indenture, meeting the requirements of section 318. It also makes it unlawful for any person to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or delivery after sale, unless accompanied or preceded by such analyses.

SECTION 306. APPLICATIONS FOR QUALIFICATION AND THE TAKING EFFECT THEREOF

This section establishes machinery for the qualification of an indenture which is not unlike the registration machinery of sections 6, 7, and 8 of the Securities Act.

Subsection (a) requires that an application for qualification be filed by the issuer, as under section 6 (a) of the Securities Act. The application must contain such of the information and documents which would be required to be filed in order to register the security under the Securities Act, and such additional information as the Commission may by rules and regulations prescribe. It must also contain an analysis of the effect of any indenture provisions with