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The method of approaching that subject is, I believe, by an entirely different route.

Now, since time is short, I will wind up, if I may, by reading, Mr. Chairman, a statement that was made in the statement to the Senate committee with regard to this being an undesirable time for putting through this type of legislation.

Mr. EICHER. Did the investment bankers participate in the Senate hearings last summer?

Mr. FROTHINGHAM. Last summer, Mr. Buttenwieser, who will speak in a few moments, participated, made a statement, which while it was not on the bill as it stands today, still, reaches the fundmanetal structure of today's bill.

Our broad objection to the bill is on the grounds of present expediency. The timing seems unfortunate. Since the bill was first introduced, circumstances in the business world have altered fundamentally and unfortunately very much for the worst. An emergency in the national economy has arisen. The paramount issue therefore is now to avoid every move which will retard the functioning of the capital markets. There is in this suggestion, of course, no intention to deny the advantages that under more normal conditions would flow from a modification of some trust-indenture practices. But we cannot escape the conclusion that the serious deterrent effect at present on the flexibility of capital markets in the passage of this minutely regulative, time-consuming and cost-increasing legislation should and can now be avoided.

It would, of course, be unfair to magnify the importance of this proposed legislation. Its nonpassage will not of itself free capital markets. There are too many other factors also involved. Neither would its passage kill the investment-banking business, but it would unquestionably be a definitely retarding influence in the recovery of the capital markets.

This is not a plea of evasion, but is rather a plea that realism prevail at this critical juncture. Business now needs a relief from unnecessary repressions that it may employ labor and pay the costs of government. These considerations, we submit, are in themselves controlling on the score of present expediency.

A very great light of hope would be given to the capital markets if some way can be found, as I know Mr. Douglas and the Commission want to find it and are working toward it, to simplify the present processes that have come into existence so that without departing from the correction of abuses sought the process of arriving there may be simpler to understand and facilitate in that way the entire process of the capital markets.

There are being created, sir, too many distinct bottlenecks which are preventing the free flowing of the capital markets, with the net result that temptation is always put on Government to find some way by creating additional agencies to take up what is called the slack. That is one of the thing which led to the passage of the Glass bill enlarging the lending facilities of the Reconstruction Finance Corporation. That has in fact put the Reconstruction Finance Corporation into the investment banking business.

I am not going, for the moment, to say whether in the end that will prove desirable or otherwise, but what I do say is that it has in the immediate present added another doubtful factor, another hazard,

another difficulty, in the way of the investment banking fraternity helping in this situation.

Mr. EICHER. Thank you.

Mr. FROTHINGHAM. Thank you.

STATEMENT OF OSCAR W. HAUSSERMANN, BOSTON, MASS.

Mr. EICHER. Mr. Haussermann, we will hear you.

Will you give your full name and address to the reporter?

Mr. HAUSSERMANN. Mr. Chairman, my name is Oscar W. Haussermann; my address is 50 Federal Street, Boston, Mass. I am a partner in the Boston law firm of Ropes, Gray, Boyden & Perkins.

Mr. Chairman, I have been asked a number of times to come to Washington and speak before committees. This is the first time I have ever come to speak.

I am here in opposition to this particular bill, and I hope you will believe me when I say that my opposition does not issue from any reactionary spirit or any instinctive hostility toward Federal regulation in itself.

I appreciate the fact that this Barkley bill is born of a fine spirit of desire to protect indenture security holders, and a sincere conviction that indenture trustees should be forced to transform themselves from passive to active trustees and to free themselves from conflicting interests, and I recognize that this particular bill involves at one phase with the general but very difficult problem of how much and what kind of Federal regulation and of industry and finance is reasonably necessary or advisable in the public interest.

I oppose this bill not because I am against Federal regulation, but because I think this particular measure entails excessive and the wrong kind of governmental regulation.

The bill, read against the background of the Securities and Exchange Commission report of June 1936, appears to stand for three general propositions:

First: The proposition, about which there is no dispute, that trust indentures now in common use are complacent toward the idea of passive trustees as distinct from active trustees, and do not say the right things or discourage or prevent trustees from acquiring conflicting interests;

Second: The proposition, which I think is highly debatable, that, taking the Nation as a whole, the functioning, or rather the lack of functioning, of trustees generally under these trust indentures has created a national evil; and

Third: The proposition, in which I do not concur at all, that the protection of investors and the general welfare require governmental regulation of the specific nature and scope contemplated by this Barkley bill.

I do not quarrel with the professed general purpose of the bill, but I do have misgivings as to the necessity or wisdom of the specific means it embraces to achieve its purpose.

I have time only to announce or advance three general objections to the bill, which I think are the principal objections.

My first objection is this: The bill says in effect that the statutory provisions of the moment and the regulations of the moment shall be picked up and set down into each long-term contract under which

corporate obligations are to be issued, forced into trust indentures, whether they have a life of 20 or 30 or 50, or more years.

Now, I know that neither the Congress nor the Commission assumes omnipotence or infallibility. Therefore, I think it is accurate to say that this feature is on the face of it practically certainty that after experience, trial, and error the Congress on the one hand will find some of the statutory provisions that it forced into indentures were either unnecessary or unwise or unworkable, and that the Commission on the other hand will find that some of the regulations which it had forced into indentures as contractual parts of those indentures are unwise or unworkable.

In other words, this particular bill if enacted will produce each year a crop of long-term indentures which would embrace the statutory provisions and the regulations of that year and would continue to embrace those regulations and statutory provisions even though long ago the Congress or the Commission had abandoned some of them.

Mr. Douglas has suggested that an answer to this objection is an easy amendment clause in the indenture. Well, as you know amendment of a statute and regulation is one thing. Amendment of a formal and formidable long-term trust indenture is another and different thing.

It makes good sense to avoid inflexible statutes and regulation and therefore it makes good sense to leave the Congress and the Commission comparatively free to amend statutes and regulations.

On the other hand, a corresponding flexibility and facility in amending trust indentures would, in my opinion, work a serious handicap on the sale of these indentures. First it would leave the original buyers of securities with less assurance that their original bargain will remain substantially intact.

I do not think that these suggestions that an easy amendment clause in the indenture is a sound answer. I think the easier it is to amend the indenture, the more difficult it is to effect sale of the indenture securities.

A second objection centers around those provisions which have the effect of subjecting bank deposits to increased risk by virtue of the extra chances or large liabilities which the trustees, by virtue of this bill, are obliged to run.

I think it is sound and logical and one of the purposes of this bill, is to impose upon trustees higher standards of conduct with attendant risks of large liability. As to whether this is merely regulatory, I just suggest consideration of a case that might easily arise of some bank being obliged to pay under this act a very large liability that forced it to close its doors, and then the balance between the protection of depositors and protection of the indenture security holders will be

obvious.

The third objection centers around those provisions of the bill which put the Federal Government in the business of writing a goodly portion of each trust indenture on the Commission's own terms.

Except for certain matters, such as the interest rate, the amount of the issue and the nature of the original security, the matter of sinking fund and the terms governing the sinking fund; the matter of whether the bonds are to be convertible and the terms and conditions of the

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conversion, the call price, and so forth; except for these matters, the parties closest to the situation, closest to the issuing company, and its business, and its financial needs, and closest to the market of the buyers would be denied the right to determine the terms of the indenture. Each indenture would have to be taken to Washington, to the Commission, which would have practically unlimited power to prescribe the provisions which the bill says the indenture shall contain. Now, it is true that the bill purports to qualify or limit the powers of the Commission when it prescribes these provisions of the indenture which, however, I submit that these qualifications or limitations are merely rhetoric rather than real.

To illustrate: In one part of the bill the Securities and Exchange Commission in defining the trustee's duties before default is to be guided by what it terms to be consistent, by the duties which a prudent man if he were a trustee would assume and perform. In another part of the bill the Securities and Exchange Commission in writing out the provisions as to the trustee's duties in case of default, is to be guided by what it, the Commission, deems would be the duties which a prudent man would be expected to observe if he were a fiduciary and had the degree of skill which the indenture trustee has or says it has, whichever is higher.

In another part of the bill where the Securities and Exchange Commission is empowered with determining the provisions with respect to release and substitution of property and with respect to additional issuance of indenture securities and with respect to satisfaction and discharge of the indenture, the Commission may insist upon such provisions which the Commission deems adequate in the light of the bargain of the parties, having due regard to the public interest and the interest of the investors.

And in the final part of the bill, when the Commission determines the provisions defining default and governing the trustee's rights and powers with respect to entry into possession of the trust estate, and so forth, the Commission is guided merely by what it shall deem adequate, having due regard to the public interest and the interest of investors.

I think this language justifies these two concluding remarks:

First: The question of whether the Securities and Exchange Commission is observing the proper standard is virtually left to the determination of the Securities and Exchange Commission itself. If the Securities and Exchange Commission is wrong, or an aggrieved party thinks it is wrong, the only redress is an appeal to the courts, and until the courts finally decide whether the Securities and Exchange Commission was right or wrong in a given case, any refusal by the Securities and Exchange Commission to qualify an indenture and to permit the public sale of the indenture securities continues in full force and effect.

Second: If an indenture must contain a certain provision, then as a practical matter, the language or scope of that provision must be whatever the Securities and Exchange Commission deems it ought to be.

Now, I realize that my objections have less force, if there is no other means by which the worthy aims of this bill could be achieved. I see no way of avoiding giving the Commission the unlimited powers I have just mentioned, if you are going to pass a bill like the Barkley

bill, which requires the Commission's prior approval as to form and substance of the indentures before indenture securities may be sold. The probable necessity of clothing the Commission with such power if such a bill is to be passed is, in my opinion, the reason why a bill of the Barkley type should not be passed.

I believe it is possible to frame a bill that would meet each of the three objections I have just named and at the same time achieve substantially the general aims of the Barkley bill.

The type of bill that I have in mind would embrace these salient features and I hope to close this very shortly. I do not want to develop a blind spot as to the possible test of this type of measure.

First. Such a bill would make it unlawful to use the mails or instrumentalities of interstate commerce to offer or sell or send indenture securities unless the same are issued under an indenture having as a party thereto a qualified indenture trustee.

Second. No banking institution-now, we are invoking our lawsno banking institution, Federal or State, would be a qualified indenture trustee unless, except by virtue either of (1) membership in the Federal Reserve System or (2) an agreement with the Board of Governors of the Federal Reserve System, it was subject to the rules and regulations of the Federal Reserve System as to the duties which corporate trustees were to have and the System's rules and regulations as to the standards to be observed in the performance of such duties.

Third. The statute and these rules and regulations would saythis is flexible that the contracting parties who frame the trust indenture, namely, the underwriters, the issuer, and the corporate trustee, are free to trade out the terms of the indenture but that, notwithstanding any provisions of the indenture to the contrary the trustee shall have certain statutory duties and be subject to certain statutory standards of performance.

Fourth. Any breach by the trustee of these duties or any deviation from these standards would entitle the Federal Reserve System to suspend or revoke the trustee's right thereafter to serve as a trustee or to engage in the trust business.

Fifth. This penalty would be the only penalty so far as the statute went. In other words, a breach by the trustee of his statutory duties or of the rules and regulations of the Federal Reserve System would not affect the validity of the indenture or the validity of the securities and would not entitle security holders, by virtue of the statute, to any civil rights in the nature of damages or rescission as against the trustee. Whatever civil rights in the nature of damages or otherwise which the security holders would have would be dependent solely upon the terms of the indenture itself.

Sixth. The filing or registration or governmental approval of trust indentures would not be conditions precedent to the right to use the mails or interstate facilities to offer, or sell, or send the indenture securities.

A bill following the foregoing general outline would not, of course, have as many teeth in it as the Barkley bill. However, I believe it would have sufficient teeth to bring about the principal aim of the Barkley bill-namely, the aim of transforming corporate trustees from passive to active trustees. And in so doing, such a bill would not place permanently into trust indentures as integral, contractual parts

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