STATEMENT OF ROBERT M. HANES, CHAIRMAN OF THE COMMITTEE ON FEDERAL LEGISLATION OF THE AMERICAN BANKERS' ASSOCIATION AND PRESIDENT OF THE WACHOVIA BANK & TRUST CO. OF WINSTON-SALEM, N. C.

Will you give

Mr. EICHER. We will hear Mr. Robert M. Hanes. your full name, representation, and address to the reporter?

Mr. HANES. Mr. Chairman and Mr. Boren: My name is Robert M. Hanes. I am chairman of the Committee on Federal Legislation of the American Bankers' Association and president of the Wachovia Bank & Trust Co., of Winston-Salem, N. C.

I would like to make clear that we are not appearing here as proponents of the bill or as opponents to it. We had previously worked with the Securities and Exchange Commission on the bill, and we simply want to state our experience and our belief as to the bill.

This proposed legislation affects directly every bank and trust company which has a corporate trust department. When the legislation was first suggested in the report of the Securities and Exchange Commission, although we did not accept as well founded many of the statements and conclusions in that report, we were confronted with the choice of opposing all regulatory legislation in this field and attempting to work out some system of self-regulation or of offering to cooperate in the preparation of regulatory legislation, so that the ultimate bill would be a livable and workable bill. We recognized that the purpose of the Securities and Exchange Commission in suggesting legislation, as stated by Mr. Douglas, was to bring the procedure of corporate trustees to the high standards set by the best and most responsible persons in the profession. With this objective, of course, we were in full agreement.

The only question was as to the methods to be used to accomplish that end. We strongly preferred a system of self-regulation, subject to the supervision of the Federal Reserve Board. We did considerable work on a proposed "Statement of principles for the conduct of trust institutions," and we discussed with Mr. Landis and Mr. Douglas the feasibility of accomplishing the desired results by the adoption of such a voluntary code, which would make legislation unnecessary. Mr. Landis and Mr. Douglas, however, disagreed with us and stated strongly that they believed that legislation was necessary and informed us that the Securities and Exchange Commission intended to press for such legislation.

We then asked them if they were willing to submit drafts of the proposed legislation to us, so that we could give them the benefit of our experience and suggest changes that we might regard as necessary and desirable. This has been done, and I wish here to express my appreciation of the attitude of Mr. Landis, Mr. Douglas, and Mr. Burke, and the other gentlemen in the Commission who have been so frank in consulting with us and discussing with us the various suggestions which we have made. Of course, there are suggestions which we made which the Commission has not accepted, on the other hand, many important changes were made at our suggestion and we believe,

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in the words of Mr. Douglas, that the present bill is "workable, practicable, and livable."

The bill gives great discretionary power to the Commission to approve or disapprove the form of particular indentures in connection with matters specified in the bill. The administration of the bill, therefore, will require a high degree of common sense, reasonableness, and cooperation, both by the Commission and the trustee institutions. To this end, we pledge our support. If the bill passes, we will try in good faith to make it work. If, after a fair trial, we find it necessary to suggest amendments, we hope and expect we will receive sympathetic consideration both from the Securities and Exchange Commission and from Congress.

Mr. EICHER. Mr. Hanes, does that present the well-considered views of the responsible executive officials of the American Bankers Association?

Mr. HANES. It presents the views of the Federal legislation committee, which we have reported to the Executive Council of the American Bankers Association, and our report has been accepted. Mr. EICHER. Any questions, Mr. Boren?

Mr. BOREN. I have no questions.

Mr. EICHER. Thank you, Mr. Hanes.
Mr. HANES. Thank you.

Mr. EICHER. Mr. Oliver.

Mr. Oliver will be in later.

STATEMENT OF R. G. PAGE, CHAIRMAN, COMMITTEE ON MORTGAGE TRUSTEESHIPS OF THE TRUST DIVISION OF THE AMERICAN BANKERS ASSOCIATION, NEW YORK, N. Y.

Mr. EICHER. Will you give your full name to the reporter?

Mr. PAGE. My name is R. G. Page, of New York City, address, Bankers Trust Co., New York, N. Y.

I am chairman of the committee on mortgage trusteeships of the trust division of the American Bankers Association.

The trust division early in 1936 appointed the special committee of which I am chairman to cooperate with the Securities and Exchange Commission in connection with the investigation which Mr. Douglas at that time was making of mortgage trusteeships in connection with his proposed report and any legislation which might flow from it.

The committee has representatives from 12 cities across the country, from Boston and Atlanta on the East to St. Louis and Los Angeles on the West. Each member of the committee in turn has organized an informal committee in his own district, so that it may fairly be said that this group represents the thought of trust officials generally throughout the country.

It perhaps goes without saying that the trust institutions did not welcome Federal regulatory legislation of this type. The American Bankers Association does not believe that the bill is necessary. It would have preferred to continue its efforts to bring about a satisfactory system of voluntary control, similar to that now in use in connection with personal trusts, and throughout the committee's discussions of the subject I have so indicated to the Securities and Exchange Commission.

However, the committee for nearly 2 years has worked closely with the Securities and Exchange Commission in a cooperative effort to make the bill, as recommended by the Securities and Exchange Commission, workable. The committee, on behalf of the American Bankers Association, agreed that, if as a result of the cooperative effort the bill as presented to Congress should, in the judgment of the committee be workable, the American Bankers Association would not oppose its passage. In the opinion of the American Bankers Association and the committee, the bill as introduced is workable, and I am authorized on behalf of the American Bankers Association and the committee to advise you gentlemen that the American Bankers Association will not oppose the passage of the bill.

In this connection I should make clear that the American Bankers Association has not the right and does not purport to bind individual member banks.

I feel sure that, if the bill is enacted, the financial institutions as a whole will whole-heartedly cooperate with the Securities and Exchange Commission in the Commission's administration of the act. However, it is but fair to add that on entirely new legislation of as technical and complex a nature as this bill it is quite possible, despite the careful study which has been given to its drafting, that defects will be developed after administration commences. If this should prove true the American Bankers Association would expect to recommend and believes that the Securities and Exchange Commission will urge that Congress enact appropriate amendments.

In conclusion, may I say to this committee, as I have to the banking and Currency Committee of the Senate, that the American Bankers Association sincerely appreciates the fine spirit with which Mr. Douglas and his associates on the Securities and Exchange Commission have received the committee's efforts to cooperate with it in the consideration of the provisions of the bill.

Mr. EICHER. Any questions, Mr. Boren?

Mr. BOREN. I have no questions.

Mr. EICHER. We thank you, Mr. Page.
Mr. PAGE. Thank you.

BANK OF

STATEMENT OF HAROLD V. AMBERG, VICE PRESIDENT AND
GENERAL COUNSEL OF THE FIRST NATIONAL
CHICAGO, CHICAGO, ILL.

Mr. EICHER. Mr. Amberg, general counsel, First National Bank of Chicago. Will you give your full name to the reporter?

Mr. AMBERG. My name is Harold V. Amberg. I am vice president and general counsel of the First National Bank of Chicago.

Mr. Chairman and Mr. Boren, I have a serious message in opposition, and I should like to go through with a somewhat carefully prepared statement without interruption if I may, because my time is limited. I will be glad to stop and answer questions to the best of my ability, if it is not taken out of my time.

Mr. EICHER. If it is satisfactory with Mr. Boren, we will postpone our questions until you have finished your prepared statement.

Mr. AMBERG. To avoid possible misunderstanding, may I briefly qualify myself and my status. I am vice president and general counsel of the First National Bank of Chicago, associated with the

bank since 1922 and actively engaged in matters involving the bank's functions as trustee under corporate mortgage indentures and the bank's position as a creditor of corporate debtors requiring assistance or reorganization. Until recently, when it was discontinued, I was a member of the commission on banking law and practice of the Association of Reserve City Bankers. Neither a new committee to be formed, nor the association, has had an opportunity to go on record on this bill. I am presently a member of the committee on Federal legislation of the American Bankers Association, more directly in relation to bankruptcy matters.

You have heard Mr. Page and Mr. Hanes state the attitude of the American Bankers Association.

Mr. EICHER. You are making, then, what might be called a minority report?

Mr. AMBERG. It may or may not be a little more than that. The respective attitudes of the trust-functioning banks of the country would determine that.

I do not appear as spokesman of either of these associations. My remarks express the viewpoint of the First National Bank of Chicago. Some 2 years ago, when the so-called Barkley bill in the Senate was in its original draft, we strongly supported the policy of full and cooperative discussion between the subcommittee of the trust division of the American Bankers Association-of which one of our officers was a member and the Securities and Exchange Commission, reserving, with the knowledge of the Commission, freedom to express our opinions. We had no direct participation in the extensive discussions which ensured. We had hoped that these discussions might lead to one of three results:

First, that the proposed legislation might be recast on the traditional theory of freedom of contract between the borrower, the lender, and the trustee, with full disclosure of the contract to the Securities and Exchange Commission, as against the proposed theory of dominion of the Securities and Exchange Commission over any proposed contract between the parties. The full disclosure theory, as distinguished from the dominion theory, permits a flexibility necessary to accommodate the substantive, legal, and timing requirements of each particular lending transaction. Hardly any two are alike and no one, I take it, urges that any standard form of trust indenture will meet regional needs. The full disclosure theory, retaining freedom and flexibility of contract, has proved unacceptable.

Our second hope was that, if dominion over the corporate trusteeship functions of banks was to be extended, such dominion would be lodged in one of the numerous Federal agencies now supervising banks, more particularly in the Board of Governors of the Federal Reserve System which, under the existing law, supervises bank trust operations and, if the Securities and Exchange Commission was to participate, such dominion might be exercised at least jointly with the Board of Governors of the Federal Reserve System under a flexible machinery. It should be remembered that, once the terms of a long-term mortgage indenture are set, future changes in the law or in economic conditions cannot unwrite the indenture. This approach has failed of acceptance.

Our third hope was that, if the dominion theory of supervision by the Securities and Exchange Commission was to prevail, full discussion would iron out many debatable items through a process of

mutual education. To a considerable extent, particularly in regard to conflicts of interest in the trustees, referred to by Mr. Douglas, this has occurred, and did occur, before the bill came on for hearing before the subcommittee of the Senate Committee on Banking and Currency in June 1937.

At that hearing, Edward E. Brown, president of the First National Bank of Chicago, for years previously general counsel of the bank, testified and subsequently, at the request of Senator Wagner, set forth his suggestions in a letter, dated June 25, 1937, concluding his letter as follows:

In conclusion, I repeat, as I testified on Tuesday, that the subject matter of this bill merits much more complete exploration before it is fixed in our statutory law, and that the suggestions in this letter represent a minimum of amendments to make the bill useful and desirable in a workaday world, if we are to have legislation at this time. Anything less would be risking too great a tearing of our economic, industrial, and financial fabric, and therefore clearly is not in the public interest.

Mr. Brown, having been invited by this committee to testify before it and being unable to attend, has requested me to express our bank's views on this bill (H. R. 10292) introduced in the House of Representatives last week.

The bill, as now rewritten, has been amended to meet Mr. Brown's first objection, contained in his letter to Senator Wagner, that is, a corporate indenture trustee does not disqualify itself as trustee by virtue of making a loan to an indenture obligor in cases where the indenture involves unsecured obligations or secured obligations of a maturity of less than 5 years.

As to Mr. Brown's second objection, the bill, as now rewritten, makes a gesture toward preservation of the so-called rescue loan by a trustee bank to a corporate borrower to pay rents, payrolls, taxes, and so forth, to carry it over an emergency and avoid bankruptcy. Let us make no mistake as to the merits of the time-honored rescue loan and the grief it has saved, in spite of the very occasional abuse of it. The provisions beginning at the top of page 27, H. R. 10292, as I read them, permit a trustee bank loaning to a corporate obligor within 4 months of a default on interest or principal under its mortgage indenture to retain the collateral received for such loan on condition that the trustee bank "shall sustain the burden of proof that at the time such property was so received the trustee had no reasonable cause to believe that such default would occur within 4 months," and, failing such burden of proof, the trustee bank must hold any such collateral for the pro rata benefit of itself and all the trust indenture bondholders.

By the very nature of a rescue loan the loaning trustee bank would have great difficulty in sustaining such burden of proof if in fact such a default did occur within 4 months. So, obviously, the trustee bank will not make any loan to a faltering corporation under such conditions. Incidentally, in practice, it is the trustee bank generally which is the only one that has been willing to make such a loan.

Mr. BROWN's third objection, to wit, the required provision in an indenture that the bondholders cannot waive a default in principal payment to give the corporate debtor a breathing spell, has not been accommodated in the present bill. In fact, the bondholders are not to be permitted to waive a default of interest in excess of 1 year's