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having them approved if they met broad objective principles and general rules.

Commissioner Douglas this morning said—if I mis quote him it is only because I did not catch his exact words, but I tried my best and I am trying my best to repeat their general import.

This bill is an attempt to bring uniformly higher standardized practices into the trust field.

We feel every one must concur in that, but much of a substantive nature, perhaps unwittingly, has been included in the bill.

In substantiation of that I would like to point out that on page 13 of the Senate report on the Barkley bill one section states what must be omitted and another section states what must be included. Therefore, I suggest that if on the one hand it is provided what shall be included and on the other hand what shall be omitted, the law intends that the Securities and Exchange Commission shall prescribe the provisions of the indenture.

Now, I should doubt that that is the type of legislation that one wants to pass.

Commissioner Douglas also said that the bill would not go into effect for 6 months, so that the Securities and Exchange Commission would have ample time to draft rules and regulations.

Now, with all due deference, I think that is rather optimistic. I doubt if any specific rules and regulations can cover this broad subject at all. They have not in any of the other countries we have studied; and they have not as to the other broad subjects with which the Securities and Exchange Commission has been confronted over the past 2 years and where it has been found, I believe, that disclosure is still the most adequate safeguard against the ills with which those particular laws seek to cope.

Thus, indentures will have to be separately passed upon by a vast number of administrative assistants and not by the Commissioners themselves. If we could be assured each of them would be passed upon by the present caliber of the Commissioners, then I feel that some of our doubts might be resolved and some of our fears might be allayed. However, the very bill itself contemplates that the indentures themselves will have to be passed on individually, because more often than not the term is used in the bill that the indenture, to be qualified, shall contain provisions which the Commission deems adequate, having due regard to the public interest and the interest of the investors.

That provides for a specific type of approval.

If rules and regulations were to be a governing principle, then more frequently, I should think, the term would be used which appears occasionally in the bill, namely, that the indentures have to meet certain rules and regulations.

In other words, to sum it all up, the field of the terms of indentures issued under indentures is so broad that I doubt that it can be covered at all by any rules or regulations and will have to be the occasion for individual, thousands of individual, substantive rules.

Now, there is a third

Mr. ÉICHER. Will you take much longer? You are over your time now.

You will have the privilege of extending and revising your remarks.

Mr. BUTTENWIESER. I will hurry. There is a third responsibility upon the Securities and Exchange Commission, because I think the investor would have reason to be lulled into a fase sense of security when he purchased securities which, however much you seek to disclaim it, it is known to have been passed upon, that is, the terms have been passed upon by the Securities and Exchange Commission.

Up till now, the only provision has been that there be complete disclosure, and with that, I repeat, no one quarrels, but when the terms are passed upon by the Securities and Exchange Commission, however much one seeks to disclaim it, and such disclaimer is provided in the bill, the investor would be led to believe by illicit salesmen, if you will, but in general there is some substance for their believing that the Securities and Exchange Commission has passed upon the terms of the security and therefore they have passed upon the merits of the security, and that therefore there was not investment risk, and we all know that there are investment risks.

Now, my last point is that as a result of the many and varied rulings which would, I fear, result from this bill, as to the terms of the indenture, no borrower, no corporate borrower, would know in advance to what pattern its indenture would have to conform in order to be qualified. This would cause more delay, more confusion, more expense and more delay in capital financing at a time when capital markets should be expanding, and when, as Commissioner Douglas himself quite rightly pointed out this morning, our economic welfare depends on pumping private capital into channels where it is needed.

So, in conclusion, Mr. Chairman, I should like to say that, however deeply the Investment Bankers Association's special committee considered the subject, and however liberal and progressive it tried to be in its thinking, it is inevitably led back to the belief that full disclosure is the only cure for such ills as may have existed or exist in the field under discussion. We feel that it is sound public policy to entrust to the Commission authority to make certain that the protection which the prospectus represents as being insured to the indenture security by the indenture under which it is issued is actually so afforded. We do not, however, feel that Congress should delegate, or that any governmental commission should assume, the responsibility of passing on the substantive provisions of any indenture.

Though this responsibility may not be apparent from a cursory reading of the bill, a careful analysis of it clearly demonstrates that this is the power with which it vests the Securities and Exchange Commission. It appears to us that through this process the Securities Act of 1933, as amended, is being transformed from an administrative law whose fundamental concept is provision for adequate disclosure, to an approval law whose underlying principle involves specific approval of individual indentures of all types of corporations, large and small, and, through that approval, of securities issued by such corporation under such indentures. Such a transition we firmly believe must inevitably lead to lulling the investing public into a false sense of security and this, of course, is something which we know Congress and the Commission would sedulously seek to avoid.

Mr. EICHER. Mr. Buttenwieser, we all have faith in the ability of the Government to find some persons equally as capable after Mr. Douglas and his colleagues have given up their posts to carry on.

Mr. BUTTENWIESER. I fervently share your hope.


Mr. EICHER. Mr. Jones.

Mr. JONES. Mr. Chairman, my name is Allen Northey Jones, 2 Wall Street, New York. I am a member of the Investment Bankers Association's Committee on Trust Indentures and I am an officer and a director of Morgan, Stanley & Co., New York.

In the 2)2 years that our firm has been in business we have been the underwriters or managing underwriter for groups of underwriters that have purchased from obligors for resale something over $2,000,000,000 face amount of securities, and of these something over $1,800,000,000, have been issued under 46 different trust indentures.

I have been working on trust indentures for about 18 years, ever since I have been in business.

I want to say that we are against this bill because we think it is wrong in theory. We think that the bill is not the proper method for attaining the ends in view, nor is it the time to pass such a bill.

I want to remark particularly on the effect this bill would have on the preparation of trust indentures. I think we all agree that the aims of Congress, of the Commission, and of investment bankers are the same, namely, that this indenture, this contract between the obligor and the security holder which runs from 1 to 50 or more years should be a fair contract. Certainly the investment banker, as Mr. Buttenwieser said, is interested in attaining this end because in the original instance he usually purchases the securities as a merchant, and he wants to see that he has a merchantable product. If he does not have a merchantable security issued under a fair indenture he cannot continue long in business, as his continuance in business is dependent upon his reputation for selling good wares. Therefore we have been continually striving to get this contract as fair as we can possibly get it between the obligor and the investor.

It is true that there have been faulty indentures, but as a rule it has not been the faulty indenture which has caused the losses which have been suffered by investors. Generally the indentures have worked successfully. With few exceptions the losses to investors have been caused by the business losses of the corporations, not by the faulty indentures.

What does this bill do; how does it affect the preparation of indentures? We have a provision here in section 6 which deals with refusal orders. It says that the Commission shall issue a refusal order which would stop the public offering of the security if it finds that the indenture "contains any provision which is misleading or deceptive, or the elimination of which is necessary or appropriate in the public interest or for the protection of investors to prevent the circumvention or evasion of this act." I know that that sounds all right on its face; and that without analysis everybody would agree with it; but when we look at the Senate committee report on this provision we see that

it says:

The provision with respect to misleading or deceptive provisions will permit the Commission to prevent the inclusion in an indenture of a so-called “negative pledge clause” which, though purporting to provide protection to the bondholders, can be so readily circumvented that the protection afforded thereby is illusory.

Now, what is a negative pledge clause? The most generally used negative pledge clause appears in an indenture covering unsecured debentures and says that the corporation will not pledge any of its


assets unless at the same time it ratably secures the debentures issued under the indenture.

Now, it is true that a relatively small number of these negative pledge clauses have been circumvented; but I ask whether it is right to make a rule to do away with all padlocks because some padlocks have been picked.

After the report of Mr. Douglas came out-and it attacked these negative pledge clauses—we talked to a number of institutional purchasers of securities, particularly insurance companies. It does not apply to savings banks, because they cannot buy unsecured debentures. We said to the insurance companies, "Would you rather have the negative pledge provision or not?" And they said, “We want it for the protection that it affords. It is not a perfect protection, but we wish it for what it does afford.”

And now it is proposed to leave the insertion or deletion of this kind of protection, that investors want and should have, to the uncontrolled discretion of the Commission which on a theoretical basis may say, "No; we do not think that this is good protection. It is an illustory protection, therefore, cut it out.'

Now, I am afraid that the time is getting late and I do not have time to talk about a number of other types of provisions, like the after-acquired-property clause which the Commission may or may not think is illusory or not perfect protection. The negative pledge clause is the only one that is methioned here in the Senate report. I do not know what Mr. Douglas things about the after-acquired property clause.

That is the type of clause where the existing property of a company is mortgaged and then this clause says that there shall be included under the lien any property which may be acquired in the future.

Now, that would seem to afford protection to investors. If we merge two corporations, and they each have the after-acquired property clause in their indentures, there is a conflict between the after-acquired clauses, and the Commission may say that the protection is illusory. I may say that I do not know the answer to that. I do not know what the Commission would think about it. Now, these examples could be added to time after time, and it is proposed to give to the Commission the right to insist on the deletion of any clause which in its discretion it may think is illusory. What the Commission deems to be illusory may be based either on the clause not having worked in some instance in the past or on its not working if some future event should change conditions. People began working on indentures in the eighteen forties. The early mortgage indentures were only 4 or 5 pages long. Now, they are great long documents, and I do not know how within the short space of 6 months or a year we are going to be able to get anything which will be near the perfect indenture. We have been moving forward all of the time and we are trying to improve these indentures all of the time, and I just do not see how anyone can sit down and write a concrete set of rules as to just exactly what these provisions shall be and shall not be.

So much for the veto power of the Commission on the provisions which it in its sole discretion although acting in good faith may disapprove, but still the Commission might be wrong.

On the other hand, we have in section 8 on page 43, line 17 a provision that the Commission has the right to prescribe the form

or forms of any provisions which, pursuant to section 7, are required or permitted to be included in an indenture.

In addition to the indenture provisions about the qualifications of the trustee and the conflicts that might arise in respect to the trustee, starting in with section (e), I find 29 different provisions of the indenture which the Commission may prescribe. In other words, in this

Mr. EICHER. Section 7 (e) you are referring to?

Mr. Jones. Yes. I do not know whether you want me to, Mr. Chairman, read you off this list of these 29 provisions which the Commission can prescribe in indentures.

Mr. BOREN. You might put it in the record. I would like to have it.

Mr. JONES. I will. (The list referred to is as follows:) The 29 provisions of the indenture set forth in sections 7 (e) to 7 (n) inclusive, which the Commission is given the right to prescribe in section 8 of the bill, are as follows:

1. As to reports by obligors. 2. As to reports by the trustee. 3. As to bondholders' lists. 4. As to trustees’ duties re recording and filing indentures. 5. As to trustees' duties re applications of proceeds. 6. As to trustees' duties re authentication and delivery of securities. 7. As to trustees' duties re release or substitution of property. 8. As to trustees' duties re satisfaction and discharge of indenture. 9. As to trustees' duties re performance of other obligations under the indenture. 10. As to notice of defaults. 11. As to trustees' standard of action in case of default. 12. As to trustees' reliance on certificates. 13. As to protection of trustee from liability for errors of judgment made in good

faith. 14. As to authorization of bondholders to direct action of trustee. 15. As to undertaking for costs of suits. 16. As to obligor's obligation re release and substitution of property. 17. As to obligor's obligation re issuance of additional securities. 18. As to obligor's obligation re satisfaction and discharge of the indenture. 19. As to definitions of defaults. 20. As to right of entry. 21. As to obtaining judgment. 22. As to institution of foreclosure proceedings. 23. As to intervention in judicial proceedings and filing proofs of claim. 24. As to the rights of security holders re accountings by trustees. 25. As to rights of security holders re bringing action to collect. 26. As to rights of security holders re meetings of bondholders. 27. As to qualifications, rights, powers and duties of paying agents. 28. As to restrictions upon employment of attorneys or experts with possible

conflicting interests. 29. As to obligor's obligation to record and file the indenture.

Mr. JONES. I submit that, with power to write these specific provisions, and write the indenture to this extent, and to veto other provisions of the indenture if the Commission does not agree with them, you are practically granting to the Commission the right to write the private contract.

There are so many of the provisions which may be prescribed, and this veto power on the provisions which the Commission does not like is so broad that you are giving to the Commission, granting to the Commission, the power to write this contract as between the obligor and the investor.

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