thereof the statutory provisions and commission regulations of the moment; would not subject bank depositors and the banking structure of the country to the jeopardy which the Barkley bill would create; would not place the Federal Government in the business of writing a goodly portion of future trust indentures; and would not involve the impedimenta on the flow of private capital into private industry which the registration requirements and approval theory of the Barkley bill entail.

Mr. EICHER. In connection with your suggested amendment, Mr. Haussermann, do you honestly believe that public opinion would stand for such an enlargement of the money monopoly that the Federal Reserve System already has so as to include within its control practically the entire investment field?

Mr. HAUSSERMANN. The suggested bill by virtue of using the power of commerce under interstate commerce would draw in all commercial banks which would like to engage in the corporate trustee business. Mr. EICHER. I understand that.

Mr. HAUSSERMANN. They would have to file an agreement in keeping with the provisions.

Mr. EICHER. As I understand you, the trustees in all cases would have to be members of the Federal Reserve System.

Mr. HAUSSERMANN. No. No one could be a trustee, indenture trustee, unless (1) he were a member of the Federal Reserve System, or (2) he filed with the Federal Reserve System an appropriate agreement which would subject itself to the rules and regulations of the Federal Reserve System.

Mr. EICHER. That would certainly be substituting Federal Reserve regulation in place of regulation by the Securities and Exchange Commission.

Mr. HAUSSERMANN. But, the point there is that the rules and regulations would impose statutory, or the statute would impose statutory duties. The parties drafting the indenture would be free to draft as they are now, but I seriously think that if the statute and the regulations forced upon trustees the rule of active trustees, as distinguished from passive trustees, the substantial aims, the salient aims of this particular bill would be achieved. The penalty, I think, is a real penalty-suspending or revoking the power to the commercial banks to engage in that business hereafter. If a bank outside of the Federal Reserve System did not file this agreement then the indenture would not have as a party thereto a qualified indenture trustee and thereefore those bonds issued under that indenture could not be sent through the mails or interstate facilities. Mr. EICHER. Any questions?

Mr. BOREN. I have no questions.
Mr. EICHER. Thank you.

Mr. HAUSSERMANN. Thank you.

STATEMENT OF BENJAMIN J. BUTTENWIESER, NEW YORK, N. Y.

MR. EICHER. Mr. Buttenweiser, will you give your full name and address to the reporter?

Mr. BUTTENWIESER. My name is Benjamin J. Buttenwieser, 52 William Street, New York City. Mr. Chairman

Mr. EICHER. Representing whom?

Mr. BUTTENWIESER. The firm of Kuhn, Loeb & Co., investment bankers, New York.

I am chairman of and here represent the Investment Bankers Association of America's special committee on trust indentures.

At the very outset, Mr. Chairman and Congressman Boren, I would like to point out that with a view to being helpful in this entire situation, the Investment Bankers Association in the spring of 1936, when this subject was first broached by Commissioner Douglas' report on trustees and trust indentures, appointed a special committee on trust indentures, of which committee I have the honor to be chairman.

The first memorandum submitted by this committee contained a statement which I should like to read to you this afternoon, because it embodies the principles of conduct which the Investment Bankers Association has sought to follow in its consideration of this legislation. It stated that:

The Investment Bankers Association wishes to emphasize that, for the continued improvement of financing methods and standards and for the protection of investors, it heartily favors any legislation which will better serve and safeguard the important interests of investors and borrowers, which the investment banking business serves

and result in what Commissioner Douglas rightly desires, as do we all, namely, the restoration of investors' confidence with a further resultant easing of the capital market.

In the interest of saving your time I have not sought to read to you gentlemen the memoranda that we have already submitted in opposition to this bill.

They have already been incorporated in the Senate record of the hearings and they are available to you, or we can submit copies to you. Mr. EICHER. We have the Senate hearings available.

Mr. BUTTENWIESER. I would like to point out, however, that broadly speaking we feel that the basic defects enumerated therein are still generally valid. Furthermore, due to the lateness of the hour and due to the fact that Commissioner Douglas and others have so lucidly explained the bill, there is no need of my consuming your time by a repeated analysis of it and I will confine myself merely to considering four questions raised by the bill which I, as chairman of the committee, consider basic.

They are the result of sincere study and reflection and I hope you will realize that they are neither selfish nor captious.

The first question is whether the entire field of the terms of securities issued under trust indentures as differentiated from the duties of trustees is susceptible of legislative regulation. In that regard, I might pause for a moment to say that the Investment Bankers Association's special committee studied the practice with regard to trust indentures and with regard to the issuance of securities under such indentures in England, France, Germany, Switzerland, and Holland, and we failed to find any regulation such as is sought to be embodied in this bill as to the terms of securities.

I would suggest that the reasonable inference from that study is that possibly trustees' duties might be standardized and regulated, but the terms of the securities themselves cannot be so regulated.

I would not for a minute mean to suggest that we have exhausted this study in all of the countries of the globe, because it was impossible for us to study all of them. Our unfamiliarity with the very languages

would prevent our studying it in some of the oriental countries; but our most sincere effort to make a careful survey of leading financial centers of the world, those I enumerated, resulted in our being unable to find that the terms of securities were susceptible of that type of regulation.

Possibly that may account for why a part of the American Bankers Association appears to approve the bill, whereas the Investment Bankers Association, the part I represent, must necessarily disapprove the bill.

Now, I concede that the duties of trustees flow from the indenture provisions that are set up in any indenture, but this bill goes much further.

It will perhaps not be unfamiliar to you gentlemen if I repeat that this is an approval rather than a disclosure form of statute.

The Securities Act is a disclosure form of statute and I doubt that anybody can validly dissent from that principle.

We, however, say that disclosure is adequate.

Approval is something quite apart from that and the reason I say that disclosure is adequate is that, with all due respect to Commissioner Douglas, who made a very careful study of the subject, in most cases the underwriter is not, as was suggested this morning, a commission merchant. He is the primary purchaser and he wants to buy a saleable security. Under the Securities Act, the terms of the security must be fully disclosed.

Now, I say in most cases the investment banker is not a commission merchant. Of course there are certain cases, and perhaps that is what Commissioner Douglas had in mind this morning, where the underwriter sells securities on an agency basis, that is, does not assume an unqualified obligation to buy an entire issue. He sometimes takes them on what the term would imply, that is, he takes on consignment.

I submit, however, gentlemen, that is the exception rather than the rule. Usually the underwriter either buys an issue outright with no reservations and no safeguard toward assuming anything but an unqualified obligation to pay for those securities at a certain time, or in the case of the underwriting of securities which are being offered to shareholders, because of the mandatory provisions of the stock of the corporation in question, he stands ready to take the unsubscribed portion.

So from those two aspects the investment banker, as he is termed, is a merchandiser of securities. He buys securities in order to sell them.

The original parties, therefore, to a contract are the investment. banker, the underwriter, on the one hand, and the obligor on the other.

The trustee really acts in a representative fiduciary capacity and the reason I described the underwriter's role at some length, gentlemen, is because this bill in its preamble recites-and I am quoting

now:

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

(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 inves

tors would in any event be unable to procure the correction of the defects enumerated in this subsection.

Now, I submit, gentlemen, that this is not a precise or realistic representation of what takes place. The investment banker is the primary purchaser of security issues. So in the first instance he becomes the investor, but as I pointed out a moment ago, no investment banker buys those securities for permanent investment. If for no other reason he would not have the capital to pay for and continue to hold, all securities he buys. Second, he is, as he is called in England, a merchant banker, merchandizing securities, just the same as a department store buys shoes; buys them and resells them to the public. Therefore, if for nothing other than a selfish reason, the investment banker is at pains to see to it that the terms of the security are as attractive and the safeguards as numerous as it is reasonable to include in the securities which he seeks to sell to the public.

Mr. EICHER. Yet, he does not become an endorser when he sells. them.

Mr. BUTTENWIESER. No; neither does a seller of shoes become a guarantor that those shoes will last for a certain length of time; but I submit, Mr. Chairman, there is no one more ruthless in his appraisal of the merits of a security or of shoes, if you will, than the public, and if I buy shoes from Macy's in New York, or some store in Iowa, and they do not last very long, I will be quite certain not to buy shoes at that store again. So likewise if I buy and sell securities which the public has a bitter experience with because I have been short-sighted or have been negligent or inefficient in formulating their terms, the public soon puts me as an investment banker out of business, because it ceases to buy my securities.

Now, it was for that reason that in a memorandum which we submitted to the Senate Committee which I mentioned a moment ago we stated the very practical test of the situation, demonstrating that this is not the fact.

I am referring now to the citation I just made from the preamble that the investors are not represented, when the terms of a security to be issued are determined upon. The banker who purchases the bonds or securities represents the investors in such an issue. If for no other than a selfish reason, the bankers are naturally zealous in their endeavors to have each indenture under which securities are issued render the greatest possible protection to such securities, so that their resale to the investing public will be more readily facilitated.

A statement such as that cited above-I am referring again now to the statement from the preamble-can only be based on a mistaken view of the realities of the investment situation, or I might add the fallacious principle of reasoning from the specific to the generic, which is an elementary error of logic.

In this regard we believe that the substitution of a governmental agency for an original purchaser, such as the investment banker, in the regulation of the substantive terms and provisions of a security is unsound.

It is our sincere belief that the interests of investors are better served when a governmental agency, such as the Securities and Exchange Commission, sees to it, as it now has within its power to require, that all of the provisions and terms of the security are clearly disclosed.

In that line, I might cite what I think is an analogy. We have had for some years on the national statute books the Pure Food and Drugs Act. Now, the Pure Food Act, as I understand it, requires a clear and lucid description of the contents of any food or drug container. If one sells Sloan's Liniment one must reveal what the contents are. However, as I understand it, the act does not guarantee that Sloan's Liniment will cure some particular ache or pain nor does it contemplate there shall be no doctor in this country, and one should merely buy certain medicines which will have stated on them what their contents are. Thus, some governmental agency by adding the stamp of its approval, suggests that one need no longer consult a doctor as to the use of a certain remedy.

The reason I cite that analogy is that in addition to being the original purchaser of security issues, a banker performs another very important role. I refer now, of course, to the investment banker. He acts as financial adviser, so to speak. He is in the same position relatively toward his clients as the doctor is toward his patients.

The terms of buying are usually set by seasoned buyers who rely on the advice of the investment banker in whom they have confidence, just the same as I consult a doctor or you gentlemen consult a doctor in whom you have confidence, and those clients are very keen and very alert to sense, as would a patient, any unsound advice given by their financial doctor or any unsound provision in securities designed by the investment banker.

Therefore, if a full disclosure is made, as is already provided for in the Securities Act, similar to the disclosure under the Pure Food Act, we maintain that there is not the further danger that people will feel that any type of governmental approval is included in this supervision, but which might be interpreted as such if this bill became a law.

It has been said at times, and I think repeated here today, that the investment bankers very often would favor the corporate buyer because the corporate buyer if he could not meet the terms suggested by one banker might shop elsewhere.

In that line I would like to submit to you gentlemen a statement which was recently made. It said:

The banker whose business it is to make loans to sell is apt to favor the investor at the expense of the borrower.

Gentlemen, that might sound to you like an investment banker pleading his own cause. It might sound to you like some one who engaged counsel to formulate some catchy phrase which might appeal to the imagination of legislators. However, that statement was made by neither of those types. It was made by one of the most respected governmental officials, and I submit by one of the largest lenders in the country. That statement was made by Mr. Jesse Jones in a magazine article which appeared on June 26, 1937, and I cite it because I feel Mr. Jones' experience will appeal to you gentlemen as adequate refutation of the statement that has been made here previously.

Now, as a result of the provisions which would be included in this bill, instead of defining broad lines on which indentures would be qualified, as we see it, the Securities and Exchange Commission would specifically be approving countless individual issues. This would result in countless substantive rulings approving indentures, rather than