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over indentures. In this respect, the proposed legislation differs from any legislation which I can recall.

Section 8 (a) provides:

Among other things, the Commission shall have authority, for the purposes of this act, to prescribe the form or forms in which information required in any statement, application, report, or other document filed with the Commission shall be set forth, and to prescribe or recommend forms of indentures or of any provisions required or permitted to be included therein.

I have just taken an excerpt from the middle of the paragraph. Notice these words: "the Commission shall have authority." other words, the Commission is given authority to write the contract. If a man goes to borrow money, for example, he meets the underwriter and he meets the trustee, and they all agree upon it. The Commission is given authority to set that all aside and to write its own indenture and say, "Take this indenture here, or you don't sell the securities."

I do not anticipate that the Commission is going to exercise that full power; nevertheless, it is given to it. It is also given the power to require certain provisions to be inserted in the contract and to prevent any other provisions being inserted which it feels should be omitted. Frankly, I say to you that is giving more power to any commission than should be given to it without restriction.

The CHAIRMAN. What power? I am sorry I missed that.

Mr. CANRIGHT. The power of the Commission to dictate what the terms of the contract are going to be between the borrower and the lender and the bondholder and the trustee.

Senator HUGHES. I thought that that was a suggestion.


Senator HUGHES. A suggestion as a form or a guide.

Mr. CANRIGHT. No; let me read the whole provision to you.

SEC. 8. (a) The Commission shall have authority from time to time to make, issue, amend, and rescind such rules and regulations and such orders as it may deem necessary or appropriate in the public interest or for the protection of investors and to carry out the provisions of this act, including rules and regulations defining accounting, technical, and trade terms used in this act. Among other things, the Commission shall have authority, for the purposes of this act, to prescribe the form or forms in which information required in any statement, application, report, or other document filed with the Commission shall be set forth, and to prescribe or recommend forms of indentures or of any provisions required or permitted to be included therein.

They can recommend them, but I call your attention to the fact that they have the right to prescribe forms of indenture.

Senator HUGHES. Is that any more than the power to say to them that they shall not put in this and they shall not put in that, by reason of the rules and regulations?


Senator HUGHES. The prescribing or recommending of forms is not any more than their exercising of the authority they have in the other part of the bill.

Mr. CANRIGHT. But whether you put it under one provision or the other, it gives the Commission that authority.

Senator HUGHES. If you left out the part that gives the Commission the right to prescribe the form-it may do that you still under the bill have the same right, by another means, of prescribing the form, by saying, "You shall not do this, and you shall not do that."

Mr. CANRIGHT. That is right. They would still have the right by working under particular provisions.

Senator SMATHERS. Do you regard that sentence which says that the Commission may prescribe the form, to authorize the Commission to provide, also, the substance that goes into it?

Mr. CANRIGHT. Really I do not see how you can prescribe the form without putting in the substance. Certainly, they do not mean to write in the part that has no bearing on the contract. Unless they are going to put in the vital things of the contract, there would be no purpose in their having control over it at all.

Senator SMATHERS. I understand that you mean that the Commission shall say to you the form in which you shall file with them the substance of whatever agreement you may enter into as trustee?

Senator HUGHES. And that those things that are essential to letting you make your own contract must be kept out?

Mr. CANRIGHT. That the Commission has the right to prescribe the form of indenture in the contract between the trustee and the borrower and the bondholders. There is no limit upon them. There are provisions in here giving the Commission the power to prevent the writing into the indenture of anything that it feels should not be in there and to insert any provision that it feels should be inserted. Let me give you a practical idea of this. Let me say that I have worked all day and all night representing the trustee; that the underwriter was there and the borrower was there; and that the underwriter was demanding certain things that he thought would be of advantage and protection to the bondholders. The company had there its accountants, its engineers, and its operating men to see whether it could afford to make those agreements. As the borrower said to the underwriter, "There is no need of our agreeing to these things if we cannot perform them."

I have spent weeks working on some indentures in the same way. There seems to be an impression that these indentures have been worked up by underwriters, trustees, and corporations with an idea of seeing how they could fleece the lender out of his money; but, as we all know, that has not been true. These indentures represent the experience of many years in long-term borrowing. For the most part, it has been done honestly. The underwriter does not want his security holders to lose. The corporation does not want its securities to go into default, for that would hurt its reputation. The company is practically gone if its securities go into default. The trustee does not want them to go into default. Why should they work on a trust indenture that is not going to protect the bondholders? I say to you that in every case in which I have worked on a trust indenture, that has been the attitude of the men engaged in the work.

Sometimes underwriters have not the ability they should have when they attempt to underwrite securities. Sometimes they are careless, but I have yet to deal with the underwriter of securities of national importance, such as we are trying to control here, who was not vitally interested in seeing that those securities were properly protected. I do not say that there are no cases, but rather that they are certainly very few in proportion to the other cases. It is not the normal case, in which the underwriter does not try to protect his security holders.

Senator HUGHES. It would be your thought that the provisions of the law should require the trustee to exercise reasonable care, and

that there should be left out the provisions relating to his responsibility, relieving him of almost all of the trust liabilities? You think that if that is done, this would not be necessary?

Mr. CANRIGHT. That is not exactly my thought, frankly. I have never regarded the so-called exculpatory clauses as relieving a trustee from obligations other than damages-money damages. I have never felt, because it is said that we do not have to act that we did not have to pay any attention to the trust indenture unless somebody called our attention to it. We are always doing it. We are doing it every day. There is not a day passes but that there is some problem which comes up under the trust indenture, as to whether the company is doing what it ought to do, or a company comes in to see whether under its indenture it can do these things. I do not believe there is any trustee of any size, or handling any of these other propositions, that does not have the same experience. I had not intended to dwell upon this question of negligence, but I may say a word in passing, adding to what Mr. Brown has said and to what Mr. Posner said this morning.

This exemption of the trustee for liability for negligence was not put in there for no purpose. Underwriters sell the securities, and they are going to have to depend on the trustee to protect those securities to a considerable extent. They are not going to let the trustee relieve itself from liability for negligence, unless there is some good reason for it, and there is a good reason. Some reasons were mentioned by Mr. Brown and by Mr. Posner, so I shall not repeat them. But another reason that was not mentioned by them expressly is that the responsibility which the trustee must assume is out of all proportion, not only to the fees that it does receive now but to any fees that it could possibly be paid.

For example, you know what it was in the old days-and it may be the same way today-with railroad companies in the country. If the railroad company had had an accident and came up before a country jury, the railroad was wrong. That was all there was to it. The railroad company could stand those liabilities, because, after all, its liability for negligence was small in comparison with its total income from the business.

But here you may have a trust indenture out of which you will receive a total of $5,000, and you may have $50,000,000 of liability. You cannot increase that $5,000 sufficiently to underwrite that $50,000,000 of liability. Furthermore, it would not be so bad if a trustee were going to be liable for negligence because it did not get some insurance policies it was supposed to have, or did not get some certificates it was supposed to have, when it released some property. If the trustee were going to be liable for only that negligence, that would not be so bad. But the negligence that the trustee fears is the liability where it is a matter of good business judgment.

A certain default arises. The bank has either got to foreclose or not foreclose, or do something else. The only thing the bank can do is bring to bear on that its best business judgment. After it has done that and has thought over it nights, as my friend has stated he has thought over such things, and as every trustee has thought over what he is going to do under those circumstances, and the bank has done the very best it could, and the thing goes wrong in spite of all that, and even though the majority of the bondholders are satisfied that

the bank did the right thing under the circumstances, still a disgruntled bondholder can come along and bring an action against the bank for negligence.

You know what the situation was during this depression. Let me ask you what chance a bank would have had, no matter how well it had done its job as trustee. Juries would have thought you did wrong in view of the circumstances.

The CHAIRMAN. You are talking about juries. You have very much less confidence in juries than I have. I have sat for 6 out of 8 years presiding at jury trials. I do not know what I would have done without juries. I think that when the average American citizen becomes a juror, he becomes suddenly conscious that he has got to do a great service. I do not agree with you on the cases of the little fellow against the big fellow. I just want to make this defense for the jury system.

Mr. CANRIGHT. I am not critizing the jury system; I agree that the jury system is the best way in which we can work these matters out. It is in times of hysteria that banks are going to be hit the hardest.

The CHAIRMAN. Was it not because of the fact that there were some disclosures made that the better banks had to suffer?

Mr. CANRIGHT. Yes; many banks had to suffer because of the faults of a few, but it would not have made any difference if it was the bank that had done its job properly, for when it came into that trial, it would have been affected by this hysteria against banks. There would not have been a bank in the country that did a trust business of any size that would have existed. Unless you are going to destroy the banking system of this country, you cannot throw on this burden of negligence. You have got to get some other way of assuring yourselves that a trustee is going to do its job.

I was talking about the Commission having the power to write trust indentures or to say what should go in and what should not go into the indentures. Let me say with all frankness and with all kindness, and without any depreciation of the high quality of the men who are on the Securities and Exchange Commission, men with whom I have had the opportunity to talk and for whom I have great respect, that there are written into this bill provisions which seem to me to indicate that this very body which is going to have the right to say what shall go into trust indentures and what shall be taken out of trust indentures has not had the experience that is needed to deal with practical problems, otherwise those provisions would never have been put into the bill.

For example, section 7 (f) provides [reading]:

The indenture to be qualified shall contain provisions which the Commission deems adequate, having due regard to the public interest and the interests of investors, requiring each obligor to furnish or cause to be furnished to the institutional trustee thereunder, at stated intervals, all information in the possession or control of such obligor or of any of its paying agents as to the names and addresses of the indenture security holders, and requiring such trustee to make the same or the use thereof available to indenture security holders, subject only to such terms and conditions as the Commission deems not detrimental to the public interest or the interests of investors.

In the same section, paragraph (g) reads:

The indenture to be qualified shall

Notice that these are mandatory provisions

contain provisions imposing upon the indenture trustee such specific duties and obligations prior to default (as such term is defined in such indenture) as the

Commission deems consistent with the duties and obligations which a prudent man would assume and perform prior to such a default if he were trustee under such an indenture * * *

Section 7(m) of the bill provides:

The indenture to be qualified shall contain such provisions as the Commission shall deem necessary or appropriate in the public interest or for the protection of investors in respect of the following matters

Then, under that section and paragraph, there is section (4) (C), which reads:

the rights, powers, or duties of the indenture trustee with respect to the institution of foreclosure proceedings, proceedings for the judicial or other sale of the property subject to the lien of the indenture, or for obtaining, in its name as such trustee, a judgment for the entire amount due and owing under the indenture. Notice what the trustees are to do in the case of foreclosure. The Commission is not going to decide these things in the light of circumstances as they exist when the problems arise; they are telling you what you are going to do 15 or 20 years ahead when these circumstances arise. These limitations are going to be written into the indenture. They will put you in a strait jacket, throw you out, and tell you to sink or swim at your peril. They are going to write these things into the indenture when the facts are not known.

I say to you, in all seriousness, as one over whose desk these problems come every day, that only an omniscient God could write such provisions and write them intelligently; it cannot be done by Man.

Let me give you a simple illustration. Suppose a man owes you $1,000 on a note that is due September 1. Can you tell me today what you will do if he fails to pay his note when it matures? Of course you cannot. That will depend on very many circumstances which will affect your action. It will depend on whether he can pay part of it, what his chances are to give you additional security, and a thousand and one other things. You cannot tell today what you are going to do then or even 2 months from now. Yet the Commission proposes to write into the indenture what the trustee shall do 15 or 20 years from now, when the times may not even be the same as those in which we are now living.

I tell you, gentlemen, that it cannot be done. If you attempt to write those things into an indenture, you will either destroy the obligor or the trustee or the bondholder, or all three of them.

Senator HUGHES. Your conclusion is that it should not be written in at all, then, because you certainly would not wait 20 or 30 years hence to see what you would do. It ought to be done to safeguard it. Mr. CANRIGHT. My thought is that you have got to have some provision by which you are going to have reasonable assurance that you have got trustees which are honest, which have a proper regard for their duty, and that have reasonably good business judgment; and you have got to rely on those trustees exercising their best judgment. That is what they are paid for.

Senator HUGHES. But let me come back to what I suggested a moment ago. The courts have laid down rules in cases of that kind that a trustee is held to reasonable care.


Senator HUGHES. Without any of those provisions in there, you will be left out and be held liable as a trustee for exercising trust powers.


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