as we are in those which are imposed prior to default. Institutional investors are usually very well organized to protect themselves subsequent to default, and I think as a general rule they would prefer to do so rather than leave the matter in the hands of a third party. So, our principal concern with this section-that is, subsection (h) of section 7-is that the act will not restrict freedom of action on the part of mutual savings banks in protecting their own holdings. My understanding is that the intent of this act is to impose on the corporate trustee the duty to take action in the interim until the bondholders have had an opportunity to organize for protection on their own account. If I am wrong in that, we will except to that particular portion.

We do query, however, a portion of subsection (m) of section 7 with reference to other indenture provisions, and particularly with reference to paragraph (5) of that subsection. It may be that the broad powers presumably conveyed by this subsection (m) are not intended, but as now written it would seem that the Commission would have a right to almost write the contract between the bondholders and the issuing corporation, particularly with reference to the rights, powers, and remedies of the security holders. We would prefer that the jurisdiction conferred upon the Commission with reference to indentures be confined to the question of the duties of the corporate trustees, the scope of their powers, and related matters, rather than going into the broad field of the terms of the contract itself. I think that is all, sir. The CHAIRMAN. Thank you very much.

Senator HUGHES. You would not want the Board to have the power to make the contract, or to dictate the contract, or to advise as to the contract?

Mr. OLIVER. No, sir; nor to substitute its judgment for what we may consider as being the rights and powers of the security holders themselves.

Senator HUGHES. And yet, if the contract were defective, if the contract were written in the interest of the trustee, excusing it from liability, and all that kind of thing, to use a homely phrase, are not the beans spilled at that time? When you come on later, the mischief has been done if the contract is not right in the first place.

Mr. OLIVER. I do not quite follow you.

Senator HUGHES. If you do not safeguard the investor in your contract, how are you going to safeguard him later?

Mr. OLIVER. I do not know whether I quite follow you or not, sir, but my point is that it seems to me that the powers conferred on the Commission should be confined to the things which they are attempting to remedy, that is, first, the alleged inactivity of corporate trustees, and the question of conflicts; and that they should not go into the broader field of attempting to write the entire terms of the indenture. The CHAIRMAN. How about exoneration?

Mr. OLIVER. I have not touched on that. My personal view is that there should not be any.

Senator HUGHES. It should not be in the contract.

Mr. OLIVER. Yes, sir; you are talking about the ordinary exculpatory clause, which relieves them from everything except gross negligence.

Senator HUGHES. Those provisions should not be there?

Mr. OLIVER. No, sir.

Senator HUGHES. They should exercise the powers of trustees, and should assume the responsibilities of trustees.

Mr. OLIVER. I think they should, sir.

This is all subject to the qualification that our people do not want the act to go too far, and to prevent a responsible corporate trustee from acting.

The CHAIRMAN. You are usually so very clear, Mr. Oliver, that I could not quite understand what you meant by limiting the jurisdiction to-I have even forgotten your limitation, but you would not have the Commission write the contract.

Mr. OLIVER. What I meant was this

The CHAIRMAN (interposing). You still want some supervision, to see that certain clauses are not put in there, such as exoneration from certain duties or obligations?

Mr. OILVER. Yes; I have particular reference to the language found in paragraph (5) on page 42, starting at the beginning of subsection (m). It says:

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:

(5) The rights, powers, and remedies of the indenture security holders and the manner in which and conditions upon which such rights, powers, and remedies may be exercised,

and so forth.

It goes far beyond the supervisory powers with reference to corpo

rate trustees.

Senator HUGHES. You do not mean that the Commission's duties should start after the contract has been made and the bonds issued?

Mr. OLIVER. I think that the Commission, under this bill, does not presume to do anything after the indenture has been approved, after it has been filed, and there has been no exception to it. It is not a continuing supervision.

Senator HUGHES. Except that it supervises the approval of the indenture.

Mr. OLIVER. That is right.

Senator HUGHES. That is the most important thing in it, it seems to me, because then you have fixed the liabilities, the duties, and so forth, of the trustee.

Mr. OLIVER. That is all right. I will go that far with you, but I do not want to go further than that, and let them write the terms of the contract as a whole. I do not know that that was intended at all. I am merely calling attention to the language of the bill.

Senator TOWNSEND. Mr. Oliver, what would you think of the suggestion of Mr. Canright, that the Comptroller have supervision? Would the banks feel safer with the Comptroller's supervision?

Mr. OLIVER. I did not hear Mr. Canright's suggestion. I was in the back and I did not hear him very well.

Senator TOWNSEND. It was that the law be amended so that the Comptroller would have supervision, and that, having close contact with all the banks' resources, he was the logical man to supervise it. Mr. OLIVER. My personal view, Senator Townsend, is that it is not particularly important who administers this bill, inasmuch as the bill sets up, itself, certain minimum standards, with some discretion,

of course, in the regulatory agency. I would rather think, howeverand again that is my own personal view, without having considered the matter that inasmuch as the Securities and Exchange Commission deals with the very securities that are being issued, and the two matters are somewhat related, it might be advantageous for the Securities and Exchange Commission to likewise supervise the preparation of the indentures.

The CHAIRMAN. Of course, they also conducted the investigation, did they not, which brought out many of the abuses attempted to be corrected?

Mr. OLIVER. That is correct.

The CHAIRMAN. Thank you very much, Mr. Oliver.

The CHAIRMAN. Mr. Page.

STATEMENT OF R. G. PAGE, NEW YORK CITY, REPRESENTING COMMITTEE ON TRUST INDENTURES OF AMERICAN BANKERS ASSOCIATION, TRUST DIVISION

Mr. PAGE. Mr. Samuel Untermyer in his testimony on June 15 made certain recommendations for amendments to the bill having to do particularly with bondholders' lists, notice of defaults, undertaking for costs, and reliance upon certificates and opinions.

While, in my opinion, Mr. Untermyer's testimony contained a number of inaccuracies, I shall not take the time of this committee to answer any except those which relate to his proposed amendments. As to those, I believe the record should be cleared.

On the subject of bondholders' lists, section 7, paragraph (f), page 33 of the committee print of the bill, Mr. Untermyer in his testimony, beginning at the foot of page 156 of the minutes of this hearing stated:

Now then, the obligor cannot do it; he has no such information; it is the trustee who has the information; he is the one who pays the coupons.

This is incorrect. In practically all indentures it is provided that principal and interest are payable "at the office or agency of the company." It is true that in many cases the trustee institution acts also as paying agent, although this is far from always the case, and the appointment is revocable. The information belongs to the obligor and not the trustee. Consequently, the bill, as submitted, is correct in placing the obligation upon the obligor for maintaining the record and supplying it to the trustee. The bill on page 33, line 12, specifically makes available to the trustee all such information in the possession of the paying agent or obligor.

Mr. Untermyer in his proposed amendment beginning at the foot of page 158 and carrying over to page 159 of the minutes of the hearing proposes that the trustee or paying agent

be charged with the duty of ascertaining from the persons or institutions presenting such coupons for payment or to whom such interest payments are made the names and residences of owners of such bonds.

This is an impracticable suggestion, would not only seriously slow up the payment of interest but would involve the imposition of a second ownership-certificate system upon the present ownershipcertificate system required under the Federal Revenue Act. This for the reason that the Federal Revenue Act ownership certificates, because of certain exemptions granted by the act and regulations thereunder, do not always disclose the names of the actual owners,

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and particularly in the case of corporate owners require only a statement of the fact of corporate ownership. The imposition of a second ownership-certificate system would involve a serious additional burden on business.

In his proposed amendment Mr. Untermyer proposes that the lists shall be available to any bondholder, at any time, upon the payment of reasonable cost of preparing the list. Paragraph (f) of section 7 of the bill as presented requires the 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 other words, the bill now requires the trustee to make the list or the use thereof available to any bondholder subject only to such conditions as the Commission may impose in the public interest or the interest of investors. I need not tell you gentlemen that a mandatory provision that such lists be at all times available to any bondholder is not in the public interest nor in the interest of bondholders themselves. You gentlemen are familiar with the laws of a number of States putting restrictions upon the availability of stockholders' lists, and in the case of New York also upon lists of bondholders. I feel strongly that this question may be safely left in the hands of the Commission.

Mr. Untermyer's next proposal is that section 7, paragraph (i), on page 37 of the committee print of the bill be amended to eliminate the right of the indenture trustee "conclusively to reply as to the truth of the statements contained therein" upon certificates and opinions submitted to it under the conditions imposed by that paragraph. Mr. Untermyer states that this is improper because such certificates are usually furnished "by the reorganization committee or the company itself." This statement is not only inaccurate but wholly at variance with the provisions of the bill. Senator Barkley called Mr. Untermyer's attention to the parenthetical phrase now contained in paragraph (i) to the effect that the provisions on this subject contained in an indenture shall be subject to such requirements as to independence and qualifications and the exercise by the trustee of reasonable care in its selection, as the Commission may deem necessary or appropriate in the public interest or for the protection of investors, and if the Commission deems that such provisions do not materially conflict with the required standards of care, it would seem that this is a conclusive answer to Mr. Untermyer's suggestion.

His next proposed amendment deals with section 7, paragraph (k), appearing on page 38 of the committee print of the bill. He desires the bill amended so that there shall be a mandatory requirement upon the mortgage trustee to give prompt notice of every default. Such a provision would make the duty of the trustee simpler and perhaps less dangerous but in many instances certainly would not be in the interest of the bondholders themselves.

It is not necessary to point out to you gentlemen that public notice of default is certain to be harmful to the credit of the company and probably to the market price of the securities of the company. Defaults vary greatly in importance. On one extreme there may be an honest oversight perhaps in some large company an insurance premium or certain local taxes may not be paid. Is it wise under these circumstances for the trustee to publish immediately a notice, rather

than to take reasonable time and reasonable care to determine whether or not the default may be cured without danger to the bondholders? A sinking-fund default is often of real importance. On the other hand, I can conceive of circumstances where the trustee may have substantial evidence that the default is only temporary and that it may be much in the interest of the bondholders to give the company reasonable time to work out of its difficulty rather than to destroy what chances the company has by public notice of default with consequent injury to its credit.

His last proposal for amendment deals with section 7, paragraph (1) on page 39 of the committee print of the bill. Here he objects to the discretion given to the court to require an undertaking for costs and to assess reasonable costs against any party litigant having due regard for the merits and good faith of the suit or defense.

You gentlemen all know of the so-called strike suits which Mr. Untermyer himself mentions in his testimony. Unfortunately, they are all too frequent. All this section does is to empower the court in its discretion to require an undertaking for costs when it believes that a suit is without sufficient merit and to assess the costs after the litigation where it is satisfied that one party or the other to the litigation acted without good faith and without a meritorious cause. The language of this paragraph is modeled on a similar provision in section 8 of the Securities and Exchange Act.

In general, it appears to me that each one of Mr. Untermyer's proposed amendments would tend to make easier the path of the strike suit. The bill, as proposed, puts no real handicap on any meritorious action of any bona-fide bondholder.

The CHAIRMAN. Thank you, Mr. Page.

Mr. MCCOLLOM. Mr. Chairman, my name is H. C. McCollom. I am an attorney at law, in New York City. My address is no. 1 Wall Street. I should very much like to obtain the permission of the committee to add a statement to the record, if it seems desirable upon further consideration.

The CHAIRMAN. I am very sure the committee will be glad to have your views, because I know your practice involves a great many of these very questions that are raised.

Mr. MCCOLLOM. Yes; I have had about 30 years' experience with these questions.

The CHAIRMAN. We would be very glad to have your statement. I will ask you to get it in very soon.

(The statement referred to is as follows:)

STATEMENT OF H. C. McCOLLOM

NATURE OF APPEARANCE AND EXPERIENCE OF WRITER

At the hearing on June 22, 1937, I was granted permission to file a memorandum, which I am now submitting, as an interested citizen and attorney. In so doing I am not acting under any retainer or for compensation. The views set forth in this memorandum, although perhaps held by many others, are expressed by and for the writer only.

I am an attorney at law, with my office at no. 1 Wall Street, New York City. I was admitted to the bar of the State of New York in 1905. I have also been admitted to the bar of the United States Supreme Court and of various other Federal courts. For nearly 30 years much the greater part of my time has been spent in advice to and representation of trustees under corporate indentures, both before and after default. To a lesser extent I have represented also issuing corporations, bondholders, and other security holders.