be affected by the bill. So it is largely a big-town problem so far as the indenture trustee is concerned.

(See p. 97 for summary of geographical distribution of trusteeships and p. 245 for further discussion.)

As I recall there were 25 States which did not have an indenture trustee under a single one of that four and a quarter billion dollars of indentures. But this does not mean, of course, that the bonds issued under these indentures were not distributed to investors in those 25 States.

Mr. MAPES. What is the disposition of those 70 trustees to comply with the requirements of the Securities and Exchange Commission and to put in these indentures reasonably satisfactory provisions?

INADEQUACY OF VOLUNTARY CODE

Mr. BURKE. I would like to answer that in this way, sir: The trustee even if so disposed could do only a part of the job in the improvement of trust indentures that is contemplated by this bill.

The suggestion has been made from time to time that the adoption of a voluntary code by the trust institutions themselves would be sufficient to accomplish the purposes of the bill.

That might work very nicely on the matter of the exculpatory clauses, clauses relieving the trustee of responsibility, to the extent that trust institutions were willing to adopt such a code and sincerely desired to follow it. But I think in the last week or two this committee may have gotten some inkling of the fact that it might not be possible to get all trust institutions to agree on such a code. Where you have a substantial block of dissenters that-well, the old expression is, "bad money drives out good."

That is particularly true of the provisions of the bill which call for action by the issuer itself-the disclosure provisions, and the provisions designed to facilitate group action by the bondholders. The real difficulty is that the trustee is not in a position to insist on the inclusion of bondholders' list provisions, for example, nor is he in a position to insist upon a requirement that the issuer transmit summary reports periodically to the bondholders. If our trust institution insisted on provisions of that sort and the institution across the street was willing to take an indenture without them, then the issuer could go across the street to the other institution.

So our conclusion is that voluntary action by the trust institutions themselves, unless absolutely unanimous, would not be effective to accomplish the purposes of the bill, although it might work on those provisions which relate merely to the trustees' duties after default and one or two other provisions.

Mr. MAPES. What do you say as to this statement of Mr. McCollum in his brief that to hold the trustees to the responsibility of the prudent man standard would sacrifice the interest of their depositors?

RISK OF LIABILITY EXAGGERATED

Mr. BURKE. Well, my personal view, which probably is not worth very much, is that there is not much danger of that, in view of the safeguards provided by section 315 (d), protecting the trustee where it acts in reliance upon proper certificates or at the direction of a

majority of the bonds, and protecting it also for errors of judgment after reasonable investigation of the pertinent facts.

My personal view, however, is supported by the fact that a substantial majority of the special committee of trust institutions does not seem to be particularly concerned about the risk of liability under the bill as now drafted.

Besides, the Federal Deposit Insurance Corporation insures practically every single trust institution, except State trust companies which are not also banks of deposit, and the Federal Deposit Insurance Corporation rendered a report to the Senate committee not only supporting the bill, but going further and saying that they felt that the bill would be a positive advantage to the banks of the country in their capacity of investors in indenture securities. (See pp. 282 to 284 for fuller discussion.)

Mr. COLE. There is a letter on this bill also in the record from the Federal Deposit Insurance Corporation. It is in the hearings.

Mr. MAPES. Well, of course, you would rather expect one agency of the Government would support the other. I am a little surprised at the letter from the Governors of the Federal Reserve Board in taking the position in that respect.

Mr. BURKE. I think that that shows a wholesome independence, sir.

Mr. COLE. Mr. Burke, I wish you would point out a little more in detail either now or in the revision of your statement, the three indentures Mr. Mapes referred to. I believe you stated that one was about 95 percent in agreement with this bill; in other words, an almost perfect example of a trust indenture as is required by this bill before us or if this were a law.

I would like for you to point out a little more in detail the difference between the examples cited by Mr. Mapes.

Mr. BURKE. All right, sir. I think it is impossible to do it from memory. I will have to run through these sample indentures which we have analyzed in this folder.

Mr. COLE. Can you get before you all that Mr. Mapes referred to? Mr. BURKE. I think that I have practically all of them right here, sir.

Mr. COLE. All right, sir.

Mr. BURKE. There are quotations and references in the analyses. Mr. COLE. Then you referred to a code that the investment bankers suggested. There has not been anything like that very prominent in the hearings before us. Before the Senate they had some suggestions as to a code, did they not?

Mr. BURKE. The suggestion for a code, sir, comes from the trust institutions. That was a suggestion made by Mr. Page's committee back in December of 1936 and, for the reasons that I touched on this morning, the Commission was not prepared to join in recommending that that suggestion be adopted.

The code suggestion is still being made or was made at the Senate hearings by one or two representatives of trust institutions.

Mr. COLE. The clerk has just handed me this statement prepared by the Commission showing the distribution of trusteeships. I think we already have that in the record.

Mr. BURKE. I was not clear whether you had that.

Mr. COLE. My impression is that that was inserted in the hearings last week. If not, I think it might go in at this point.

I think that that went in the day that there was some statement that there was criticism that 64 percent of the trust indentures had New York institutions as trustees, and that the effect of this would be that 84 percent would very likely have New York trustees.

Did you hear that testimony?

Mr. BURKE, I do not remember that testimony.

Mr. COLE. Somebody made the statement. All right, if Mr. Mapes has concluded you may proceed?

Mr. MAPES. I would like to go back for one question.

Mr. COLE. Mr. Mapes.

Mr. MAPES. I notice in one of these indentures that a provision is made that any successor trustee must be a bank or trust company and be located in the Borough of Manhattan in the city of New York, and in this Consolidated Gas Co. case, it says that the trustee must come from either the Borough of Manhattan or the city of Detroit.

Mr. BURKE. Yes.

Mr. MAPES. I assume that that is due to the fact that money is more plentiful in New York and in the big centers rather than from any desire to favor New York institutions; is that correct?

TENDENCY TO CONCENTRATE BUSINESS IN NEW YORK

Mr. BURKE. I think that is so, sir. Some time ago, I made a check of the trusteeships awarded to New York institutions, for securities. registered under the Securities Act, and, as I recall it, 75 or 80 percent of those securities were issued by companies which had their principal offices in the metropolitan area, as many big companies do. It is only natural in those circumstances to select a New York institution as indenture trustee. In addition, I believe that under the requirements of the New York Stock Exchange the paying agency must be located in New York, in the case of listed securities, which might result in a tendency to select a New York institution as trustee, in order to have those functions gathered together in one institution.

Mr. MAPES. This legislation would tend to aggravate that and center control in New York, would it not?

Mr. BURKE. I do not see why it should have that effect, sir. I do not see why any competent trust institution could not operate under the requirements of this bill. If the bill should pass, I doubt very much if a single one of the opposing institutions will go out of the trust business.

PROPOSAL FOR CONTINUING SUPERVISION BY EXAMINING AGENCIES

Mr. COLE. Mr. Burke, in view of statements made this morning and to clear up a note I have here, one of the investment bankers in testifying before the committee in answer, I think, to questions by me as to what if any other suggestions on this bill he had to offer made reference to proposed amendment submitted by Senator Herring and Senator Townsend before the Senate committee this

year.

Mr. BURKE. I do not recall the particular reference.

Mr. COLE. Was that a bill or amendments to the pending bill?

Mr. BURKE. That was a proposed amendment to the bill then pending before the Senate committee, sir.

Mr. COLE. That is the original Barkley bill?

Mr. BURKE. Yes, sir.

Mr. COLE. Were those amendments offered at the Senate hearing with the idea of correcting the Barkley bill and make it acceptable to the investment bankers?

Mr. BURKE. Those amendments were offered on behalf of one of the Chicago trust institutions, sir. I cannot recall any expression on the part of the representatives of the investment bankers.

Mr. COLE. All right, you may proceed.

Mr. BURKE. Mr. Chairman, I understand that you would like for me to run through one or two of these analyses.

The one I will take is the first one here.

Mr. COLE. I have a memorandum here from Mr. Canright, to refer to the Herring and Townsend amendments. That is what I had in mind.

Mr. BURKE. I have here a copy of a report which was requested of the Commisison by the Senate Banking and Currency Committee on the merits of that amendment. I shall be very glad to outline our position with respect to that proposal. (See p. 287.)

Mr. COLE. Mr. Canright stated that the Herring and Townsend amendment would be inserted as a part of his testimony. Of course, his testimony has not come to us for revision as yet.

Mr. BURKE. That proposal was reported unfavorably by the Federal Deposit Insurance Corporation and the Federal Reserve Board, both of which took the position that, if any legislation was to be enacted having for its purpose the correcting of the deficiencies in trust indentures, the administration of that legislation should be tied in with the administration of the Securities Act.

Mr. COLE. All right, Mr. Burke, you may proceed, sir.

Mr. Mapes must leave.

Now, Mr. Burke, the analysis and history of these cases which you have given to the committee are here in this folder, and in order to save time I suggest that they be presented and inserted in the record at this point; that is, the analysis and case history showing the necessity for such legislation. The Commission furnishes that in this folder, so I see no occasion for your going through an explanation of that orally.

Mr. BURKE. Might the same thing be done with the analysis of the indentures which are in the same folder?

Mr. COLE. Yes; I included that. I want to include the folder you presented to the committee this morning.

Mr. BURKE. Yes, sir.

Mr. COLE. That may be inserted in the record.

(The matter referred to is as follows:)

CASE HISTORIES

Our reference to these cases and to the analyses of trust indentures filed under the Securities Act, which are being presented to the committee today, makes perfectly clear that this committee need not confine its attention solely to the factual material set forth in the Commission's Report of its Study of Protective and Reorganization Committees. Further evidence of the need for this legislation is currently becoming available to the Commission in the per

formance of its duties under the Securities Act of 1933 and under chapter X of the Bankruptcy Act, as amended.

This case provides direct support for two provisions of the bill: First, the prohibition against a single institution acting as trustee under two or more indentures of the same issuer; and, second, the prohibition against the inclusion in the indenture of clauses which absolve the trustee from observing the standard of ordinary prudence, even after default. See sections 310 (b) (1), 315 (c), and 315 (d).

The Bridge Co. is now in the process of reorganization under the corporate reorganization provisions of the Bankruptcy Act. Pursuant to the provisions of section 172 of that act, the proposed plan of reorganization was submitted by the court, as of February 6, 1939, to the Securities and Exchange Commission for an advisory report. The Commission filed its report on March 14, 1939. The facts set forth in this summary are largely based upon that report, which is set forth in full in an official Commission release, dated March 24, 1939 (Corporate Reorganization Release No. 9).

The Bridge Co. was organized in 1927 to construct the "Ambassador Bridge" across the Detroit River, connecting the city of Detroit with the city of Windsor in Canada. In order to build the bridge there were sold to the public $12,000,000 first-mortgage 61⁄2-percent sinking fund gold bonds, and $8,000,000, 7-percent sinking-fund participating gold debentures.

The first-mortgage bonds were issued under an indenture dated August 1, 1927, which was secured by a first mortgage on the physical properties of the company both on the Canadian side and on the American side. The debentures were issued under an indenture which was secured only by the deposit of the stock of a wholly owned Canadian subsidiary which held title to the properties in Canada; but, as stated above, the property of the Canadian subsidiaries was subject to the mortgage securing the bonds.

The same trust institution was designated as indenture trustee under both of these indentures.

The bridge was opened to traffic on November 15, 1929. From the inception of operations gross and net receipts fell far below the estimates. The estimates had been based upon the assumption (which was not realized) that the bridge would also be used by railroad traffic. They had also failed to take into account the possibility of competition from a tunnel, which was being actively promoted at the same time.

As early as February 1931 interest on the debentures was defaulted. At that time the interest on the bonds was paid with the aid of a bank loan, but the August 1, 1931, interest payment on the bonds was also defaulted. The underwriters of the securities arranged for the appointment of protective committees, the members of which represented various security houses that participated in the distribution. Each of the committees has on deposit approximately one-half of the issue.

Neither the indenture trustee nor the committees appear to have taken any steps to impound the receipts of the company. Judicial proceedings for reorganization were first instituted on May 26, 1938, by the company's filing a petition for reorganization under the Bankruptcy Act. The petition was approved and the company was left in possession of its assets. Shortly thereafter a proposed plan of reorganization was filed.

As the Commission points out in its advisory report, it appears quite plain that the entire assets of the debtor are worth only a fraction of the amount of the first mortgage debt, even if no regard is paid to the accrued and unpaid interest thereon. This would ordinarily require that the entire property be turned over to the bondholders and that no holders of securities of junior rank should be given any participation unless they made a new contribution. Nevertheless, the plan of reorganization provides for participation by the debenture