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undertakings, certificates of the obligor and its officers will suffice; but on some of these major things, such as substitution of securities, by and large, that safely could be handled only by requirements that independent auditors or independent engineers make their appraisal or their audit, and submit a certificate to the trustee.


Under section 7 (h) on page 36 the bill deals with notice of default. Ordinary fairness would seem to demand that knowledge of the occurrence of the more serious defaults under the indentures should not be the exclusive property of a few. The bondholders certainly should be advised of such defaults, for failure to give such notice presents a serious obstacle to the organization of bondholders in their own interests. (See pt. WI, Trustees Under Indentures, pp. 31 to 42a.)

Now, in the case of lesser defaults, less serious defaults, less discretion may properly be vested in the trustee to determine whether the giving of notice is to the best interest of the bondholders. It is a good illustration of what I mentioned about flexibility. There is not, by law, any mandatory requirement that in the case of all defaults the trustee shall immediately give notice. That probably would be very bad practice; but there is permitted

Mr. EICHER. You mean because of the effect on its credit?

Commissioner Douglas. Precisely. Because there might be for a few hours a technical default, purely technical. To publicise such a default very likely would do irreparable damage to the credit of the company. Instead, the bill provides flexibility to select and sort out defaults, for purposes of classification under an indenture, in view of the specific type of situation being dealt with; types of default as to which notice must be given; types of default as to which the trustee can properly keep silent.


Now, section 7 (i) on page 37 merely requires all indenture trustees to live up to the standards of conduct to which the more conscientious trust institutions now endeavor to adhere. It is substantially the same standard as that required of trustees under the so-called personal trusts. RESPONSIBILITY OF TRUSTEE

Section 7 (j) on page 37 prohibits the inclusion of so-called exculpatory clauses relieving the trustee from liability for its own negligence or its own willful misconduct.

This section and the sections relating to the duties of the trustee before and after default, primarily concern the trust institutions themselves and, of course, the bondholders. I understand that the committees representing trust institutions do not oppose the provisions of these sections, in view of the safeguards provided in this section and in section (k) on page 39.

Now, 7 (j) generally permits the inclusion in the indenture of provisions protecting the trustee with respect to action taken in reliance upon proper certificates or opinions of attorneys, accountants, or other experts, and provisions protecting the trustee for action taken in reliance upon the instruction of the holders of a disinterested majority of the outstanding bonds.

It also permits the inclusion of provisions protecting the trustee with respect to losses arising from errors of judgment, if the trustee was not negligent in ascertaining the pertinent facts. In other words, we have endeavored to work out, with the cooperation of the best minds in the corporate trust business, what would be a practicable, workable, and safe standard of care for the trust institutions.

Sections 7 (j), 7 (i), and 7 (k) seem to us to meet that situation, from the point of view of the trustee, and from the point of view of the bondholders, to provide a standard adequate for these trusts.


Section 7 (k) protects the trustee against the risk of so-called strike suits by authorizing the inclusion of a provision in the indenture permitting the court in its discretion to require the filing of an undertaking for costs, including attorneys’ fees. A comparable provision is found in section 23 (b) of our Securities and Exchange Act of 1934.


On page 40, section 7 (1), we come to questions such as releases and substitutions of security, which I have commented briefly on already; the issuance of additional securities; and the satisfaction and discharge of these indentures. There will be little dissent from the proposition that any provision for the release or substitution of any property subject to the lien of the indenture or the issuance of additional indenture securities, or the satisfaction and discharge of the indenture should be subject to restrictions or conditions designed to prevent such provision from rendering nugatory the protection the indenture purports to provide. Under section 7 (1) the adequacy of such restriction and additions is to be determined in the light of the bargain of the parties. To revert to the one illustration that I gave earlier, if substitution of securities is permissible under the bargain that the parties have made, then the question is, Is this particular covenant safe in the light of what the parties want to do? We cannot interfere with the basic business features of these deals in any way whatsoever, but knowing the business features of the deal, can say, “You cannot let this real property come out from under this mortgage and common stock be substituted unless it is on the certificate of an independent accountant or independent engineer.”


Under section 7 (m) on page 40 we have a provision dealing with the rights, powers, and remedies of the trust and security holders. There is, I think, general agreement that trust indentures should contain an adequate definition of what shall constitute a default thereunder and should confer upon the trustee adequate rights and powers with respect to the enforcement of the indenture.

The requirements of this section will prevent, I believe, a nullification of the provisions with respect to the duties of the trustee through the device of inserting in the indenture a more restricted definition of the term “default” than is now properly contained in the better trust indentures, or through the device of denying to the trustee rights and powers which the better grade indentures now confer and should confer. Section 7 is the keystone of the substantive provisions of the act. To recapitulate, it covers conflicts of interests, by definite, certain, rules so that the trustee will know at all times, or be in a position to find out, exactly where he stands. The other provisions relate primarily to the duties of the trustee prior to default and after default. It is a step in the direction of making the corporate trustee live up to the highest standards in the profession and to see to it that by contract the responsibilities of the trustee are not whittled away to mere nothings. At the same time it is recognized that, for practical reasons, the trustee must receive some protection when he is honest and diligent and earnestly trying to do his job. There is permitted no freedom from liability for foolish conduct or gross negligence, so to speak, on his part; but machinery is provided whereby the trustee can rely upon the certificates of independent persons, and in reliance upon those certificates to allow releases and substitutions, and so forth. A third phase covered by section 7 includes reports by the obligors to the security holders and to the trustee; reports by the trustee to the security holders; and bondholders' lists the use of which this bill for the first time would make generally available to the bondholders themselves. Those three phases constitute the major substantive provisions of the measure and set flexible safeguards, duties, and responsibilities; definite and specific standards, so far as conflicts of interest go; standards which the Commission would look at in determining whether or not the particular indentures coming through for qualifications were satisfactory. Once the Commission has determined that those provisions were adequate, in the light of this statute, the Commission then would be through with it once and for all and could not come back and do anything to the corporate trustee. It would have no semblance of continuing jurisdiction over the indenture, over the corporate trustee, over the security holders, or over the obligors or the underwriters. It is an attempt, Mr. Chairman, in the final analysis, merely to establish higher uniform standardized practices in this broad field. The public importance is demonstrated by the fact that there are about $40,000,000,000 of these securities outstanding today in the hands of the public under such trust indentures. We cannot confidently expect to elevate the practices of the many to the standards of the top few unless we apply a uniform treatment. This bill in our opinion does precisely that. Mr. EICHER. You estimate that there are $40,000,000,000 of domestic issues? Commissioner Douglas. Bonds, notes, and debentures issued under trust indentures; $40,000,000,000 outstanding at the present time. Mr. EICHER. This bill does not assume to interfere in any manner with the foreign field? Commissioner Douglas. No; it does not. Mr. EICHER. Is that much of a factor at the present time? Commissioner Douglas. Well, it was for a period in the 1920's, but does not appear to be much of a factor at the present time.

If there are no questions, Mr. Chairman, that completes my statement.

Mr. EICHER. Do you have any questions, Mr. Boren?
Mr. BOREN. No.

Mr. EICHER. I have before me a list of witnesses who desire to appear in favor of the bill and also a list of witnesses who desire to appear as opponents to the bill.

I have four names of gentlemen who wish to appear in favor of the bill and five who wish to appear in opposition to the bill.

The CLERK. Here are six more.

Mr. EICHER. Making 11 altogether of those who wish to appear in opposition to the bill.

Now, I presume that we can get consent from the House to sit this afternoon.

Mr. BOREN. I will be willing to sit this afternoon, Mr. Chairman. Can any of these groups consolidate their testimony, or can we set a reasonable maximum time for these witnesses without jeopardizing their case? Can we have some sort of an agreement as to time from the witnesses ?

Mr. EICHER. The clerk can probably work that out during the recess, so that we can reasonably expect to conclude by 5 or 6 o'clock.

Mr. BOREN. I think I would prefer to have it point toward 5 o clock.

Mr. EICHER. Yes.
Will you endeavor to work that out during the recess, Mr. Layton?
The CLERK. Yes; Mr. Chairman.

Mr. EICHER. I presume the logical order should be that we should proceed after the recess with the proponents of the bill and then later hear the opposing witnesses. If that is satisfactory we will proceed in that order.

The committee will now recess to meet at half past 1. (Thereupon, at 11:55 a. m., the committee took a recess until 1:30 p. m., of the same day.)


(The committee reassembled, pursuant to the taking of the recess, at 1:45 p. m.)

Mr. EICHER. The committee will please be in order.

Mr. BOREN and I have been delayed by having to answer two roll calls. We will proceed with the proponents. Mr. Shanks.


TOR, PRUDENTIAL INSURANCE CO. OF AMERICA, NEWARK, N. J. Mr. EICHER. Please give your full name and address to the reporter.

Mr. SHANKS. My name is Carroll Shanks. I am associate general solicitor of the Prudential Insurance Co. of America, Newark, N. J.

Mr. Chairman, I am speaking on behalf only of the Prudential Insurance Co.

Last spring, at the time this bill was in the process of formulation we informally talked with a number of other insurance companies, but those talks have been so informal that although they have been carried on in a desultory way up to date, I cannot say I am speaking for any of the other companies.

We favor this bill in a general way, although we have some doubts as to the way some of the provisions may work out. We favor it, because we think that the bill as drawn would tend to elevate to a great extent the nonbusiness provisions of the indentures. We think that is certainly a worthy objective. As to the provisions of the bill which have to do with the qualifications of trustees, I do not wish to make any comments. Our sole interest in that part of the bill is merely that there shall be responsible and skillful trustees. I am under the impression that we will be able to get those kinds of trustees even under the restrictions which are imposed upon their qualifications under this bill. Now, our doubts as to the bill, strangely enough, are as to those provisions which we are most in favor of. That is, those provisions of the bill which give the Commission broad discretionary powers to make, by rule, regulation or order, to affect those provisions of the indentures which do not have to do with the business aspects. If it were not for that broad discretionary power, it would be necessary to write into this bill so-called standard form provisions which would outline what could go in and what could not. We think that would be a strait jacket, indeed, and we would be opposed to it. However, we think these discretions should be workable. We think they may have within them seeds of danger, because you may have too zealous administration in the future, or you may have a commission which may be more or less a deadhead on these features. Mr. BoFEN. What provisions do you specially refer to? Mr. SHANKS. I am referring to those provisions, beginning about page 33 and from there on which give the Commission the discretion to indicate as to all of the various points, what provisions will be acceptable and will be allowed to go in. Those have to do, as you will see, mainly with the more or less mechanical provisions of the indenture and do not have to do with the business provisions. Now, we think it is possible that in the future, by too stringent legislation, regulation or order, the trust companies and the obligors may be tied up more tightly than they should be. However, we think that this solution ought to be tried and are willing to see it tried, because we have faith in the wise exercise of discretion over a period of years of the Commission and we do not see any other way in which it could be done, except by naming right in the bill the various covenants which should be allowed. We think that would indeed be unfortunate at this time. That, really, is all I have to say, Mr. Chairman. Mr. BoFFN. You do not find any particular objection to any of these provisions, such as those requiring notice of default? Mr. SHANKS. Oh, no. Most of those provisions we think are entirely salutary and of course, as you know, we do not know what those provisions will be. It is entirely within the discretion of the Commission as to what regulations they will lay down. A wise exercise of that discretion I think should be helpful. On the other hand, an unwise exercise might be dangerous and that, of course, is the danger of the bill in our estimation. Mr. EICHER. Thank you, Mr. Shanks. Mr. SHANKs. Thank you.

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