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Mr. CANRIGHT. I pointed out that I do not think it is practical to accomplish this purpose by holding trustees liable for negligence, particularly in cases depending on the good judgment of trustees, when it is any man's guess as to what is the best thing to do. I do not think this is a practical way of accomplishing your purpose.

I have a suggestion, Senator, which I should like to make a little later as to how I think this can all be accomplished, and without placing any intolerable burdens on industry, finance, or anybody else.

Senator TOWNSEND. How many years' experience have you had?

Mr. CANRIGHT. I have been indirectly connected with this type of business for over 25 years. I have been with the bank about 10 years. I have been directly in connection with the corporate trust work there for about 10 years.

Senator HUGHES. I did not get the name of the bank with which you are connected; I was not here at the time.

Mr. CANRIGHT. I am with the Continental Illinois National Bank & Trust Co., Chicago.

A suggestion was made at the meeting of this committee, held on June 15, by one of the witnesses assenting to the bill, that there were some features of the bill which they felt were not satisfactory, but they were willing to give it a trial. If it did not work out all right, the Congress and the Commission would agree to the changes.

In 1 year's time, gentlemen, there will be many trust indentures written. If there are written into those trust indentures things that ought not to be in them, or if there have been omitted from those indentures things that ought to be in them, there is no way on God's earth by which you can change them without the consent of the bondholders. Those things will have to go on, whether they protect the corporation or defeat the bondholders or what not, unless you can convince the bondholders that the changes ought to be made. If you do that, it is going to cost a lot of money, and the delay might be disastrous.

There is just one little thing that I want to mention here in passing. Section 7, paragraph (h) (1) provides that the bondholders shall control the procedure—that is, 50 percent of the bondholders shall control the procedure-of the trustee. That is a common provision in trust indentures today. I do not know why they have said they should control the place of conducting the meeting or litigation. I do not know why they should control the place, but I do not care. However, in our trust indentures today we have a provision which apparently the Commission objects to very seriously; namely, that the bondholders are obligated to put up the funds or to furnish the trustee indemnity before the trustee is obligated to act.

I submit to you that in the whole law of trustees and trusteeships, whether it be as to trustees under wills, trustees under living trust indentures, or otherwise, I have yet to find a case making it the job of the trustee to use its own funds to protect the trust estate. There isn't any such thing, and naturally it would be very unjust if there were. In your personal trusts you do not need it, because the trustee has the funds in his own hands to protect the trust estate. In this particular case he seldom does have the funds, and that is why the trustee demands it. :

It may not be known, but trustees do sometimes, in emergency cases, advance funds. We have advanced thousands of dollars, that we have outstanding today. I imagine that we have advanced $30,000

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in certain cases where there were emergencies, where the bondholders were not organized, and where we had to act promptly. But we do not like to do that. We haven't any right to do it. The Federal Reserve Board or the Comptroller comes along and writes it off as a bad debt. We think the money will be collected in time. We are satisfied that it will be collected, but certainly it is not liquid. We do not like to use our own money, and it ought not to be necessary to do that. The only way I know of meeting that situation is at the time when the corporation becomes obligated under trust indenture to require it to put up $2,000 with the trustee, to be held until such time as it defaults. That is the only way I see of meeting it, if the bondholders are not going to pay the money.

Senator SMATHERS. Is there any regulation today of the relation between the bondholder, the public, the trustee, and the underwriter?

Mr. CANRIGHT. Well, I don't know of any regulations today governing those things. That is, they are not common.

There may be isolated instances of it.

Senator SMATHERS. Is it your opinion that there should be no regulation of that relation?

Mr. CANRIGHT. Not at all. I shall come to that a little later.
Senator SMATHERS. All right.

Mr. CANRIGHT. I started in the beginning by saying that the Commission, I believed, had shown the necessity for greater supervision over corporate trustees, and I still stand on that position. However, I do not believe they are going about it in the proper way.

There is one other thing. It may be said that the party has a right to appeal to the court. There are two answers to that. First, the law permitting appeals to the court provides that the findings of fact by the Commission shall be conclusive on the court. Practically all of the things to which we have objected will be findings of fact and, therefore, not subject to be set aside by the court.

In the second place, as anyone familiar with these things knows, if you are going to get out any financing, it has got to be done in a reasonably short time. If you appealed it and the court did sustain you, you would find it an empty victory, because by the time you got back with the victory, the opportunity for making a loan would be gone.

If I may just summarize, I may bring these ideas together, which have been rather loosely put.

The provisions of the bill as to what constitutes a conflicting interest are not actually conflicting or inconsistent interests.

In the great majority of cases they will never become conflicting. The obligor may never default. Most obligors do not. Or if it does, it is quite probable the trustee will not then be the holder of the stock or note of the obligor.

The provisions of the bill unnecessarily hamper legitimate business deals, prevent normal business relationships, and place useless burdens on trust companies and banks.

The bill gives the Commission the power, and in some cases the duty, to determine and specify when the indenture is prepared what the trustee shall do years hence if certain events occur.

This makes a machine of the trustee. It will prevent the trustee from using good business judgment, which should be its chief duty, and may prove disastrous to some or all concerned, including the bondholders.

No effective provision is made to assure proper performance of its duties by a trustee, nor to assure that you are going to have the proper kind of trustee.

All that is intended to be accomplished by the bill can be accomplished, and much more effectively, without any disturbance or hindrance of normal business activities and with much less burden on banks and trust companies, and at very much less cost to all concerned by a very simple procedure, which I will suggest.

Both the Governors of the Federal Reserve System and the Comptroller of the Currency have at the present time very broad powers of examination and have the right to demand from banks under their jurisdiction reports of their activities. If it should be determined that it is necessary to give them any broader powers than they have at the present time, or if it should be feared that they would not exercise their existing powers to the extent they should, a very simple amendment to the sections relating to either the powers of the Governors of the Federal Reserve System or relating to the powers of the Comptroller of the Currency could be made, which would accomplish the purpose.

For convenience of reference, I will assume that it would be the duty of the Comptroller to determine whether the bank was performing its duties as trustee properly.

With reference to conflicts, the Comptroller could require a bank which is both trustee and creditor or stockholder of the obligor to report immediately-he could require it to report all the time, though I think it is unnecessaryif there was any indication that there would be a default under the indenture or that the loan of the bank might not be paid at its maturity, with a statement of what action the bank proposes to take or has taken to eliminate the conflicting interest.

In that connection, I would say that if a bank had an existing loan and a corporation increased its collateral, the Comptroller might very well provide by regulation, or you could have a provision in the law, which ever was thought desirable, that that should be prima-facie evidence that it was known that the company was getting into financial difficulties.

Senator SMATHERS. What about an individual named and acting as a trustee?

Mr. CANRIGHT. Well, you won't have an individual trustee applying to any of the cases such as the Commission has here involved. You are talking about securities that are sold in interstate commerce; you are not talking about the little $10,000 issues or even $50,000 issues. You are talking about the issues that are of national importance. The Commission itself has the right to exempt issues up to $250,000. I do not think you are going to have individual trustees.

Senator SMATHERS. I understood that some of the greatest complaint here was against individual trustees, in land deals, for instance, in one State or another.

Mr. CANRIGHT. Well, I would say this: If you have got a case of the individual trustee, do not try to deal with it under the same indenture or under the same legislation by which you are attempting to regulate corporations or trust companies which are representing large industrial users of money. That is an entirely separate and distinct situation.

The CHAIRMAN. You may have an individual trustee here, may you not-a cotrustee?

Mr. CANRIGHT. A cotrustee; yes. He is just there so that he can take title to the property and act when the corporate trustee could not.

Returning to what I was saying. On receipt of such report, the Comptroller could not only make it the duty of the trustee to change its dual capacity, but he could see that the conflict was actually eliminated.

With reference to defaults, the Comptroller could require reports from the trustee as to the fact of such default and what action it had taken in the matter. The Comptroller could, in view of all of the known circumstances, pass intelligent judgment upon whether the trustee was performing its functions properly, instead of attempting to decide that 10 or 15 years in advance. Then he knows what the situation is. He is not predicting 15 or 20 years ahead what he should do, but he knows what the circumstances are, and the Comptroller, after conferring with the trustee, is in a position to determine whether the trustee is doing his job properly or not.

With respect to the action of the trustee prior to default, the Comptroller could require reports from the trustee as to what action it was taking with reference to such matters as he deemed of sufficient importance to justify the inquiry and again the Comptroller could be given information as to all of the circumstances and in the light of existing conditions could determine whether the action of the trustee was reasonable and proper. The Comptroller with his power of examination could readily determine whether any trustee was falsifying or withholding facts.

Thus, at very much less cost and with much less trouble to all interested parties and without unnecessary interference in the normal activities of the people of the country and with no undue burden on commerce and industry, the Comptroller acting on known facts, actually existing, could see that the trustee was affording to bondholders the protection to which they are reasonably entitled. The advantage of this proposed change is, first, that it leaves it in the hands of men who are not looking at one aspect of our credit situation, but who can see the thing as a whole. You are not setting up artificial standards, because it is the best you can do, but the Comptroller would be dealing with circumstances as they arise. You are not trying to say a thing will be a conflicting interest, when it might not be a conflicting interest, and it might not cover some things which are conflicting interests. You are not going to have a rigid rule there. It enables the Comptroller to determine those things from time to time as they come up, and there is no reason why the Comptroller cannot get all the information that is necessary for him to keep track of it. And so with each of these other things

Senator HUGHES (interposing). Can the Commission do that?

Mr. CANRIGHT. As I said, it is important to have somebody who is dealing with our entire credit situation, and who sees the picture as a whole, rather than just one thing. The possibility of security holders losing money out to be considered in its relation to the whole credit structure.

There is one thing that would probably have to be added to the bill. I think there should be a provision that if the Comptroller should find that any institution, by reason of lack of ability, experience, integrity, or for any other reason, cannot or will not perform its duties properly as trustee, it should be the duty of the Comptroller to report the same to the Governors of the Federal Reserve System. He will know whether the banks are doing their job. He can report it to the Governors of the Federal Reserve System and, after a hearing, if they should decide that the Comptroller is correct, the right of the institution to act as trustee should be terminated. I think that gives you all the control over trustees that you need. It coalesces all your work relating to credits. It causes no undue burden on banks. It is not going to hamper normal relationships, and it will enable a first-class job to be done, instead of having artificial standards as to what constitutes a real trustee, and will provide a method by which you can have real trustees.

Therefore we submit that the recommendation of this committee should be that the bill be not passed.

The CHAIRMAN. Thank you very much, Mr. Canright.
Mr. Loeb.



NATIONAL BANK & TRUST CO., PHILADELPHIA, PA. The CHAIRMAN. Mr. Loeb, you are the chairman of the Tradesmen's National Bank & Trust Co. of Philadelphia?

Mr. LOEB. Yes, sir.

The CHAIRMAN. Is it in that official capacity that you are appearing here?

Mr. LOEB. Yes, sir.

Mr. Chairman, I have just a short statement to make. As I am in thorough accord with the formal statements made to you by Mr. Brown and Mr. Canright, I feel that you will agree with me that a substantial repetition will only needlessly encumber your records and that no useful purpose will be served. I do not possess their eloquence and experience to present views on this bill, and I am glad that they preceded me.

I do, however, wish to stress my belief that some of the provisions of this act are a menace to the stability and solvency of those banking institutions accepting trusteeships and therefore a menace to the banking system as a whole.

I am in accord with the purposes of this act insofar as it affords protection to security holders, but I question whether that protection is very real in the final analysis if capital funds of trustee institutions are subjected to some of the liabilities implicit in this act.

Generally speaking, liabilities will be determined by juries. Actions for surcharge always increase in adverse times and because of business depression and fall in security prices the urge to recoup losses in every conceivable manner is at a maximum. Juries at such time are apt to be more influenced by public sentiment than by evidence. Large damages usually result and even if after protracted litigation they are reduced, in the meantime the reputation and standing of the bank may have been adversely impaired. The mere starting of an action involving a large sum of money may cause apprehension among depositors, particularly in smaller communities that quite conceivably may affect the ability of a bank to serve the requirements of its depositors, resulting in restrictions to business and employment. Before commenting on the provisions of the act relating to duties of the trustee prior to default and the duties of the trustee in case of default, I should like to refer to some other features of the act, taking them up in the order of their appearance.

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