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MONDAY, APRIL 25, 1938
Hous E of REPRESENTATIVES, SUBCOMMITTEE of THE CoMMITTEE ON INTERSTATE AND For EIGN CoMMERCE, Washington, D. C. The subcommittee met, pursuant to call, at 10 a.m., in the committee room, New House Office Building, Hon. Edward C. Eicher (chairman) presiding. Mr. EICHER. The committee will please be in order. This is a subcommittee composed of Mr. Boren of Oklahoma, Mr. Reece of Tennessee, and myself, and we are met to conduct hearings on H. R. 10292, introduced in the House by Chairman Lea of this committee, to provide for the regulation of the sale of certain securities in interstate and foreign commerce, and through the mails, and the regulation of the trust indentures under which the same are issued, and for other urdoses. p This is a companion bill to the so-called Barkley bill in the Senate, S. 2344, which has recently been reported to the Senate from its Committee on Banking and Currency. (The bill, H. R. 10292, is as follows:)
A BILL To provide for the regulation of the sale of certain securities in interstate and foreign commerce and through the mails, and the regulation of the trust indentures under which the same are issued, and for other purposes
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the “Trust Indenture Act of 1938”. NECESSITY FOR REGULATION
SEC. 1. (a) Upon the basis of facts dislosed by the reports of the Securities and Exchange Commission made to the Congress pursuant to section 211 of the Securities Exchange Act of 1934 and otherwise disclosed and ascertained, it is hereby declared that the national public interest and the interest of investors in notes, bonds, debentures, evidences of indebtedness, and certificates of interest or participation therein, which are offered to the public, are adversely affected—
(1) When the obligor fails to provide a trustee to protect and enforce the rights and to represent the interests of such investors, notwithstanding the fact that (A) individual action by such investors for the purpose of protecting and enforcing their rights is rendered impracticable by reason of the disproportionate expense of taking such action, and (B) concerted action by such investors in their common interest through representatives of their own selection is impeded by reason of the wide dispersion of such investors through many States, and by reason of the fact that information as to the names and addresses of such investors is either controlled by the obligor and underwiriters or otherwise not available to such investors;
(2) When the trustee does not have adequate rights and powers, or adequate duties and responsibilities, in connection with matters relating to the protection and enforcement of the rights of such investors; when, notwithstanding the obstacles to concerted action by such investors, and the general
and reasonable assumption by such investors that the trustee is under an affirmative duty to take action for the protection and enforcement of their rights, trust indentures (A) generally provide that the trustee shall be under no duty to take any such action, even in the event of default, unless it receives notice of default, demand for action, and indemnity, from the holders of substantial percentages of the securities outstanding thereunder, and (B) generally relieve the trustee from liability even for its own negligent action or failure to act; (3) When the trustee does not have resources commensurate with its responsibilities, or has any relationship to or connection with the obligor or any underwriter of any securities of the obligor, or holds, beneficially or otherwise, any interest in the obligor or any such underwriter, which relationship, connection, or interest involves a material consiict, actual or potential, with the interests of such investors; (4) When the obligor is not obligated to furnish to the trustee under the indenture and to such investors adequate current information as to its financial condition, and as to the performance of its obligations with respect to the securities outstanding under such indenture; or when the communication of such information to such investors is impeded by the fact that information as to the names and addresses of such investors is either controlled by the obligor and underwriters or otherwise not available to such investors; (5) When, in the light of the bargain of the parties, the indenture does not contain adequate restrictions and conditions upon the release and substitution of property subject to the lien of the indenture, the issuance of additional securities thereunder, or the satisfaction and discharge of the indenture; or (6) When, by reason of the fact that trust indentures are commonly prepared by the obligor or underwriter in advance of the public offering of the securities to be issued thereunder, such investors are unable to participate in the preparation thereof, and, by reason of their lack of understanding of the situation, such investors would in any event be unable to procure the correction of the defects enumerated in this subsection. (b) Abuses of the character above enumerated have been so widespread that, unless regulated, the public offering of notes, bonds, debentures, evidences of indebtedness, and certificates of interest or participation therein, by the use of means and instruments of transportation and communication in interstate commerce and of the mails, is injurious to the capital markets, to investors, and to the general public; and it is hereby declared to be the policy of this Act, in accordance with which policy all the provisions of this Act shall be interpreted, to meet the problems and eliminate the abuses, enumerated in this section, connected with such public offerings. DEFINITIONS
SEC. 2. When used in this Act, unless the context otherwise requires— (1) Any term defined in section 2 of the Securities Act of 1933, as heretofore amended, and not otherwise defined in this section, shall have the meaning assigned to such term in such section 2. (2) The term “sale” or “sell” shall include all transactions included in such term as provided in paragraph (3) of section 2 of the Securities Act of 1933, as heretofore amended, except that a sale of a certificate of interest or participation shall be deemed a sale of the security or securities in which such certificate evidences an interest or participation if and only if such certificate gives the holder thereof the right to convert the same into such security or securities. (3) The term “underwriter” means any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers’ commission. (4) The term “director” means any director of a corporation, or any individual performing similar functions with respect to any person whether incorporated or unincorporated. (5) The term “executive officer” means the president, every vice president, the cashier, the secretary, the treasurer, and the trust officer of a corporation and, any individual customarily performing similar functions with respect to any person whether incorporated or unincorporated. (6) The term “indenture” means any mortgage, deed of trust, trust or other indenture, or similar instrument or agreement (including any supplement or amendment to any of the foregoing), under which securities are outstanding or are to be issued, whether or not any property, real or personal, is, or is to be, pledged, mortgaged, assigned, or conveyed thereunder. (7) The term “application” or “application for qualification” means the application provided for in section 5, and includes any amendment thereto and any report, document, or memorandum accompanying such application or incorporated therein by reference. (8) The term “indenture to be qualified” means the indenture in respect of which a particular application is filed. (9) The term “indenture trustee” means each trustee under the indenture to be qualified, and each successor trustee. (10) The term “indenture security” means any security issued or issuable under the indenture to be qualified. (11) The term “obligor” means every person who is liable upon any such indenture security, and, if such security is a certificate of interest or participation, such term means also every person who is liable upon the security or securities in which such certificate evidences an interest or participation; but such term shall not include the trustee under an indenture under which certificates of interest or participation, equipment trust certificates, or like securities are outstanding. (12) The term “paying agent,” when used with respect to any such indenture security, means any person authorized by an obligor thereon (A) to pay the principal of or interest on such security on behalf of such obligor, or (B) if such security is a certificate of interest or participation, equipment trust certificate, or like security, to make such payment on behalf of the trustee. (13) The term “State” means any State of the United States. (14) The term “Commission” means the Securities and Exchange Commission. (15) The term “voting security” means any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement, or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person; and a specified “per centum of the outstanding voting securities of a person” means such amount of the outstanding voting securities of such person as entitles the holder or holders to cast such specified per centum of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (16) The terms “Securities Act of 1933”, “Securities Exchange Act of 1934”, and “Public Utility Holding Company Act of 1935” shall be deemed to refer, respectively, to such Acts, as heretofore or hereafter amended.
ExEMPTED SECURITIES AND TRANSACTIONS
SEc. 3. (a) The provisions of sections 4, 5, 12, 13, and 14 of this Act shall not apply to any of the following securities:
(1) Any security other than (A) a note, bond, debenture, or evidence of indebtedness, whether or not secured, or (B) a certificate of interest or participation in any such note, bond, debenture, or evidence of indebtedness, or (C) a temporary certificate for, or guarantee of, any such note, bond, debenture, evidence of indebtedness or certificate;
(2) Any certificate of interest or participation in two or more securities having substantially different rights and privileges, or a temporary certificate for any such certificate;
(3) Any security which, prior to or within six months after the enactment of this Act, has been sold or disposed of by the issuer or bona fide offered to the public, but this excemption shall not apply to any new offering of any such security by an issuer subsequent to such six months;
(4) Any security exempted from the provisions of the Securities Act of 1933, as heretofore amended, by paragraph (2), (3), (4), (5), (6), (7), (8), or (11) of subsection 3 (a) thereof;
(5) Any security issued under a mortgage indenture as to which a contract of insurance under the National Housing Act is in effect; and any such security shall be deemed to be exempt from the provisions of the Securities Act of 1933 to the same extent as though such security were specifically enumerated in section 3 (a) (2) of such Act;
(6) Any note, bond, debenture, or evidence of indebtedness issued or guaranteed by a foreign government or by , a subdivision, department, muncipality, agency, or instrumentality thereof; or (7) Any guaranty of any security exempted from the provisions of this Act by this subsection. (b) The provisions of section 4 shall not apply (A) to any of the transactions exempted, by section 4 of the Securities Act of 1933, as heretofore amended, from the provisions of section 5 thereof, or (B) to any transaction which would be so exempted but for the last sentence of paragraph (11) of section 2 of such Act. (c) The Commission may from time to time by rules and regulations, and subject to such terms and conditions as may be prescribed therein, add any class of securities to the securities exempted in subsection (a) of this section, if it deems that the application of this Act with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved and the small amount of securities outstanding and thereafter issuable under the same indenture, or by reason of the limited character of the public offering; but no issue of securities shall be exempted under this subsection §§o aggregate amount at which such issue is offered to the public exceeds > v v.v. (d) The Commission may, on application by the issuer and after opportunity for hearing thereon, by order exempt from any one or more provisions of this Act any security issued or proposed to be issued under an indenture under which, at the time such application is filed, securities referred to in paragraph (3) of subsection (a) of this section are outstanding, if and to the extent that the Commission finds that compliance with such provision or provisions, through the execution of a supplemental indenture or otherwise— (1) would require, by reason of the provisions of such indenture, or the provisions of any other indenture or agreement made prior to the enactment of this Act, or the provisions of any applicable law, the consent of the holders of securities outstanding under any such indenture or agreement, or (2) would impose an undue burden on the issuer, having due regard to the public interest and the interests of investors.
(e) The Commission may, on application by the issuer and after opportunity for hearing thereon, by order exempt from any one or more of the provisions of this Act any security issued or proposed to be issued by a person organized and existing under the laws of a foreign government or a political subdivision thereof, if and to the extent that the Commission finds that compliance with such provision or provisions is not necessary in the public interest and for the protection of investors.
PROHIBITIONS RELATING TO INTERSTATE COMMERCE AND THE MAILS
SEc. 4 (a) Subject to the provisions of section 3, unless a security has been or is to be issued under an indenture as to which an application for qualification is effective, it shall be unlawful for any person, directly or indirectly—
(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
(2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.
(b) Notwithstanding the provisions of the Securities Act of 1933, after the expiration of six months after the enactment of this Act, no registration statement relating to a security which is subject to the provisions of subsection (a) of this section shall become effective unless such security has been or is to be issued under an indenture as to which an application for qualification is effective.
APPLICATIONS FOR QUALIFICATION AND THE TAKING EFFECT THEREOF
SEC. 5. (a) An application for qualification of the indenture under which a security has been or is to be issued shall be filed with the Commission by the issuer of such security. Each such application shall be in such form, and shall be signed in such manner, as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors. Each such application shall include such of the information and documents as would be required to be filed in order to register such indenture security under the Securities Act of 1933, and such additional information, in such form