bonds, the type of property which may be bonded, the items which may properly enter into cost. The trustee must also be given certificates or opinions that there are no prior liens on the properties to be bonded except to the extent provided by the indenture. In case property is to be released, earnings certificates are not required but there must be certificates as to the value of the property to be released and as to the value of the property to be substituted and various other similar certificates are required. In case the company has agreed to insure its property in a certain manner, certificates must be filed at period intervals with the trustee, outlining the extent to which the company has carried out these covenants, or in case the company has agreed to maintain a certain ratio of current assets to current liabilities, certificates of treasurers or accountants or other persons must be filed from time to time with the trustee indicating that the company is performing these covenants. In the case of a release of property, proper evidence must be given that the new property to be substituted for the property to be released has not theretofore been made the basis of the issuance of the bonds under the indenture. In the case where a trustee holds securities and the trustee is asked to execute proxies, various opinions of counsel must be given to the trustee in order to satisfy that the proxy is not to be used for purposes hostile to the interests of the bondholders.

INDENTURES MUST BE DRAFTED IN MANNER SATISFACTORY TO THE COMMISSION

Section 315 provides that the indenture to be qualified shall contain provisions requiring the obligor to provide the indenture trustee with such information, such certificates and opinion of attorneys, accountants and other experts and such other documents as the Commission may deem necessary or appropriate to enable the trustee to perform, or to facilitate its performance of, the duties and obligations imposed upon it under this subsection. In effect, this section means that all indentures to be qualified must be drafted in a manner satisfactory to the Commission. If the Commission has the power to prescribe the forms and scope of those opinions, certificates, and documents and what they shall be and who may give them, it has almost unlimited authority.

It is our belief that the Commission with this authority can force. the issuer and the trustee to agree to its own theories with respect to the drafting of an indenture nearly as fully as they were empowered to do under the original Senate bill.

The issuer may be faced with requirements that it can no longer use counsel who have spent years searching its titles or accountants who are thoroughly familiar with its affairs. Normally, accountants only make audits for fiscal periods. It is essential that earnings usually be for a period of 12 months within some longer period just prior to the taking down of the additional bonds. If accountants have not certified the accounts for these particular periods, it will be most costly and expensive for an issuer to have to get the accountants to certify the earnings for this period. There is no real practical risk in relying on officers' certificates for such periods in most cases. The company may have in its own employ competent and honest engineers who are thoroughly familiar with every nut, bolt, and screw, with every turbine, every dynamo, every transmission line. It would be a frightful expense and a great waste of time to require the company to call in independent engineers each time they wish to take down. additional bonds or each time they wish to have property released. Most well-drawn indentures already provide for this in the event the amounts involved exceed certain sums.

CASES WHERE ISSUER AND TRUSTEE DO NOT AGREE

You will see from all this that an issuer will no longer be able to agree with an underwriter and with a trustee upon the manner in which an indenture should be drafted. Who can tell where form stops and substance begins? It may take weeks to work out such an indenture to the satisfaction of the Securities and Exchange Commission. As a practical matter, time is usually of the essence in such cases. The company wishes to redeem bonds at maturity and must conform to certain rigid time schedules. The Commission has the power under this section to impose certain rigid requirements which the issuer and underwriter have no choice but to accept. At the present time the Securities and Exchange Commission has complete control of the capital markets. It has charge of all public offerings of securities, of the over-the-counter dealers, of the stock exchanges of the country, of public utilities and public utility holding companies, of reorganization and bankruptcy proceedings. It is no reflection upon any of the Commissioners to say that no one of them could possibly be informed as to everything that is going on within the Commission. As Commissioner Douglas said, in effect, in an interview with Arthur Krock, "When an organization gets too big, it is difficult to control it from the top. Policies are made down below." Does anyone believe for one minute that any issuer who proposes to make a public offering of securities and who must submit the indenture to the Commission for approval will have the opportunity of sitting down with a member of the Commission on drafting changes? Bear in mind there are thousands of these indentures. Obviously, the drafting of these indentures will be in the hands of the staff and every businessman in the country will have to yield his views to the views of the particular member of the staff in charge of the drafting of each indenture. Otherwise, there will not be any issue.

Mr. REECE. Mr. Chairman

Mr. COLE. Mr. Reece.

Mr. REECE. Would it disturb you for me to ask you some questions? Mr. STARKWEATHER. Not in the slightest; no. Go right ahead, Mr. Reece.

Mr. REECE. What is the difference in the procedure which you anticipate will be followed in connection with cases coming under this bill, and that which is now followed in making applications for an issue of securities at the present time?

Mr. STARKWEATHER. At the present time, Mr. Reece, the situation is about like this, that the Commission has the power to require full disclosure of all facts, and that includes the indenture as well as any other facts with regard to the company or its underwriters or relationship to anything that it wants to ask that it thinks is pertinent.

Now, under this bill we believe the proceeding is going to be something like this: In the first place, a business will want to raise some money. Now, the cost item in this thing is a very important thing as well as the difficulties and costs that extend over a period of years.

When an issuer wants to borrow money he can now go to his trustee and underwriter and agree upon the terms which in their opinion will protect the public, give the trustee reasonable latitude to see that the investor is properly protected and the issuer can go ahead and write his contract and submit it to the Securities and Exchange Commission,

and the Securities and Exchange Commission can, under the present law, force full disclosure. Now, if it does not like any particular part, it can force exposure of any particular part that it does not like; but I would say that it could force it in such a way as to make it impossible to include it in the prospectus or to do it in such a way as to make it distinctly unfavorable.

Under this bill we think that business has got to come to Washington in advance and talk it over with the Commission. Now, who does the businessman talk it over with when he comes here? He talks it over with some member of the staff who has no final authority to say what the Commission will do.

Then, he will go back and see whether his board of directors will agree to the provisions that that member of the staff said he was going to insist upon.

Now, assuming that the board of directors will agree to that, and they go ahead and write the indenture, and come down to Washington again, before they go to the expense of registering and see whether the Commission will really accept it, because in order to register you have got to go through a long and complicated procedure that costs real

money.

I do not believe, you can register an issue of $1,000,000 today for anything less than $15,000 or $20,000. That is, just supplying the information that is required under the Securities Act. That is not any other cost.

Now, the issuer is faced with this problem, do I dare go ahead and spend $15,000 getting up all of my accounting reports, and all of my engineers' reports and getting together the material that is involved in the prospectus; getting up the answers for the registration statement and some of them are perfectly astounding—I have one here, which one of my associates will probably show you later in the morning, that is probably that thick [indicating].

Now, you do not think that he would dare to go ahead and do that without coming down here. He has got to adjust his business and he has got to find out from the Commission, before he does anything, whether the Commission will approve the contract which he can afford to go ahead with.

That is the great difficulty in this procedure.

Mr. REECE. But, I would infer from what you say that under the present law it is necessary for an issuer to contact the Commission and get an understanding with reference to what the registration statement is to disclose, and likewise, an understanding of what the prospectus is to contain, before he goes to prospective purchasers.

Mr. STARKWEATHER. The Commission has long forms which contain all of the questions which they want answered. Now, of course, there may be some difference of opinion as it finally develops as to whether or not the company will give all of the facts, but any company that believes its business is clear and open; any company that believes that it can supply the information, can go before the Commission, because the only question is whether the Commission will take it there. It is not a question of whether or not you can get it through there. The only question is whether or not you in the first instance give all of the facts.

Now, in connection with these issues, in practically every case after the original papers are filed, there are deficiency letters sent out from

e written it he me he sue is nie, nie imezie Com

t

oftreet.

out the provisions of those contracts, and so does the trustee, for a period of many years.

Now, to say that the Commission, or anybody-I am not in any sense reflecting on the Commission in this connection-but to say that anybody-I know that I could not do it. I do not believe that anyone could do it but, to say that anyone can sit down and say what rules or regulations along a subject of this kind are going to be met, the conditions which are going to be met in 1950, is something that I cannot see. It does not make sense to me. It seems to me that the best you can do to protect the public is to say that the trustee shall be responsible for reasonable care in the execution of his trust, and I do not believe you can really go much further than that and make any headway, because your conditions are all so complicated.

Mr. REECE. As I understand you, you say that as far as the Government could reasonably go would be to impose upon the trustee the reasonable responsibility in discharging its trust. But, the trust instrument might be of such a nature as not to impose any trust upon him; that is, any important trust. And, as I understand, that is the thing that the Commission is trying to get at, is to see that the instrument is of such a nature as to impose upon him a trust which would be expected to be imposed, so to speak, upon a fiduciary agent.

Mr. STARKWEATHER. Well, I would not disagree with that.

Mr. REECE. And make some such arrangement or create some such agency to pass upon the compliance in advance.

Mr. STARKWEATHER. I would not disagree with you at all, Mr. Reece, in saying that it is perfectly proper that certain standards shall be clarified or shall be improved in the present trust practices, and if you want to write such a law, that we have no objection to it at all.

What we object to is this: We object to having to go before a Government bureau in advance and having that Government bureau tell us whether or not they think we are conforming to the law.

Now, that is not done in any other form of human activity. If you are doing almost anything else you can think of, you have before you the requirements of the law in that respect, and if you break that law, do not comply with the law, you are subject to criminal prosecution or civil liability. Now, why should we in this particular case change that theory and say that before this kind of deal can be made, you have got to do to a Government bureau; not to a judge; not to a court; not to a judicial authority; but you must go to a Government bureau, an administrative bureau, and ask them whether in their opinion you are complying with the law. Suppose they say, "We cannot say whether or not you are complying with the law." What happens? Suppose they say that you are not complying with the law and you do not agree with them. What are you going to do? You have a maturity to meet the 1st of January, and assuming that you could go to court-which I am going to cover in a little while I do not think that you can; but assuming that you could go to court, you cannot get a decision from the courts within 30 days or 60 days, or in time to go ahead. So, you are stopped. You have either got to do what they say or not do anything, and go into default. That is great authority you are giving to the Government, and, in our opinion, too great an authority. You are giving them this power to force you to do things which in your opinion are unwise or important, which you have to do if they want you to do it.