other purposes which to some extent are for the benefit also of the bondholders, for example, to determine that the indenture provisions are clear, consistent, and practicable for administration.29 However, it is not intended to suggest that. trustees examine indentures to determine the degree of protection afforded and whether they are of such a nature that investors would be wise in buying securities issued thereunder.

(2) The authentication of the bonds by signature to the trustee's certificate thereupon. This authentication is the check against an overissue,30 and an assurance that the conditions of certification required by the indenture have been complied with. The trustee thus accepts the responsibility of ascertaining that the conditions of certification have been met, and accepts the responsibility resulting from the language of the certificate which, in the case of a mortgage bond, would usually read: "This bond is one of the bonds described in the within mentioned mortgage." Serious liability may result from over-certification or improper certification.31 It is true also that substantial questions may arise as to whether the form of bonds presented for certification is in accordance with the mortgage; but in most cases such questions would be settled, in connection with the examination of the indenture, before the bonds were presented for certification.

(3) The delivery of the bonds to the issuer. This necessitates in many cases an examination of complicated documents to ascertain whether there has been a proper showing of the facts upon which depends the right to delivery of the bonds.32 (4) The authentication and delivery of new bonds in place of lost or mutilated bonds.33

(5) The holding and disposition of cash or securities.34 This may involve, for example, the determination whether the mortgagor has shown its right to the return of such cash or securities, or to the delivery to it of coupons from the bond collateral or of dividends and proxies with respect to the stock collateral.

(6) The delivery to the issuer of "releases" freeing property (usually real estate) from the lien of the mortgage, in compliance with the indenture; and, conversely, the refusal to release property except in compliance with the indenture.35 This often requires the study of involved instruments presented as authority for the request and frequently calls for the exercise of the trustee's judgment, based on the facts within its knowledge, as to whether or not the mortgagor is in default under any of the many indenture covenants.

(7) The scrutiny of financial and other statements delivered to it by the issuer and, in the event that the statements do not comply with the indenture, the demand for statements which do comply.

(8) The calculation, sometimes intricate, of amounts due periodically to the sinking fund,36 the receipt of sinking fund payments, or of the proceeds of fire insurance 37 or of condemnation,38 and the supervision in some cases of the condemnation; and the application of moneys so received to the purchase or redemption of bonds or otherwise,39 in accordance with the indenture.

(9) The determination whether, in case the mortgagor shall consolidate with or be merged into another corporation or shall sell its properties as a whole to

29 See Page and Gates, The Work of Corporate Trust Departments (1926), 26.

30 See Doyle v. Chatham & Phenix Nat. Bank. 253 N. Y. 369, 374, 171 N. E. 574, 576 (1930); 'Ainsa v. Mercantile Trust Co., 174 Cal. 504, 512, 163 Pac. 898, 901 (1917).

31 Doyle v. Chatham & Phenix National Bank, 253 N. Y. 369, 171 N. E. 574 (1930); Conover v. Guarantee Trust Co., 88 N. J. Eq. 450, 102 Atl. 844 (Ch. 1917), aff'd on Vice-Chancellor's opinion, 89 N. J. Eq. 584, 106Atl. 890 (1918). Other cases are cited in 7 Cook, Cyclopedia Corporations (Perm. Ed. 1931) 376. See as to responsibility for negligence in certifying bond Note (1930) 40 Yale L. J. 138-139.

32 The mortgage may require a certificate from the mortgagor as to the amounts spent on improvements before the trustee shall deliver the bonds to the mortgagor [Polhemus v. Holland Trust Co., 61 N. J. Eq. 654 47 Atl. 417 (1900)] or it may require that the trustee receive statements from the mortgagor of the application of the proceeds before so delivering, see Frishmuth v. Farmers Loan & Trust Co., 95 Fed. 5 (C. C. S. D. N. Y. 1899), aff'd, 107 Fed. 169 (C. C. A. 2d, 1901); Rhinelander v. Farmers Loan & Trust Co., 172 N. Y. 519, 65 N. E. 499 (1902).

33 In authenticating new bonds, when the old bonds are outstanding, the trustee may incur liability. See Reynolds v. Title Guarantee & Trust Co., 240 N. Y. 257, 267, 148 N. E. 514, 517 (1925); Harvey v. Guaranty Trust Co., 134 Misc. 417, 430, 236 N. Y. Supp. 37, 56 (Sup. Ct. 1929), aff'd, 229 App. Div. 774, 242 N. Y. Supp. 905 (1st Dep't 1930); 256 N. Y. 526, 177 N. E. 125 (1931); Note (1925) 11 Corn. L. Q. 86-89.

34 Trust indentures may provide for the application by the trustee of the proceeds of sale of a part of the mortgaged premises, and thus give rise to numerous problems. See e. g., Little Rock and F. S. R.. Co. v. Huntington, 120 U. S. 160 (1887); Norfolk Southern R. R. v. Guaranty Trust Co., 13 F. (2d) 979 (C. C. A. 4th, 1926). In re Trust of Leeds City Brewery Ltd.'s Debenture Stock Trust Deed [1925] 1 Ch. 532.

35 See 7 FLETCHER, CYCLOPEDIA CORPORATIONS (Perm. Ed. 1931) § 3181, and cases there cited. See also Browning v. Fidelity Trust Co., 250 Fed. 321 (C. C. A. 3d, 1918), cert. denied, 248 U. S. 564 (1918).

36 See, for example, the pertinent provision of the mortgage in Equitable Trust Co. of New York v. Green Star S. S. Corp., 291 Fed. 650 (S. D. N. Y. 1922), aff'd, 297 Fed. 1008 (C. C. A. 2d, 1924).

37 See Schroeder v. Berlin Arcade Real Estate Co., 175 Wis. 79, 184 N. W. 542 (1921).

38 See Fonda, J. & G. R. R. v. New York Trust Co., 233 App. Div. 443, 254 N. Y. Supp. 266 (3d Dep't. 1931) 39 The trustee may be confronted with serious problems in the application of such funds. See, e. g., National Trust Co. v. Whicher [1912] A. C. 377; Estabrook v. International Trust Co., 227 Mass. 281, 116 N. E. 486 (1917) Struthers Coal & Coke Co. v. Union Trust Co., 277 Pa. 29, 75 Atl. 986 (1910).

another corporation, the mortgagor has complied with its covenants and the conditions exist under which the successor is entitled to exercise the rights of the original mortgagor.

(10) The satisfaction and discharge of the indenture if facts are shown so requiring.40

(11) The keeping of the records of the trust in such a way as to show clearly at all times the numbers and principal amount of bonds which have been delivered to the issuer, the authority under which the bonds were delivered, the numbers and principal amount of bonds retired and the means of retirement, the cash or securities held by the trustee and the source from which received, the cash or securities or releases which the trustee has delivered, the authority for such delivery and, generally, a complete history of the trust. In the case of a large and active trust these records are very voluminous.

The bank which is the trustee often acts as registrar of the bonds or agent of the issuer for the purpose of paying the interest or the principal, or both; but these functions, although naturally and usually performed by the trustee, are not trustee's functions as such.

Trustees perform other services which are not required by the terms of the indenture. To illustrate, where a trustee is acting under an indenture which constitutes a second lien on property held under a prior indenture, the trustee gives notice of its lien to the trustee under the prior indenture. Similarly, if the second indenture should covenant against the issuance of further securities under the prior indenture, the trustee would give notice of such covenant to the trustee under the prior indenture. The trustee under the prior indenture ordinarily would not release the security or issue further bonds after it had received such notice. In order that they may have in their files proper evidence of the authorization of the mortgage, trustees require the filing with them, prior to the execution of the mortgage, of various supporting documents such as certified copies of the mortgagor's charter, by-laws, directors' authorization, stockholders' authorization, approval of any public service commission or other public body having jurisdiction over the issue, and opinion of counsel to the mortgagor that the mortgage gives the lien which it purports to create. They commonly maintain a "tickler system," in which are noted the dates when payments are required to be made, or financial or other statements are required to be filed, by the mortgagor; and in some cases, at least, they advise the mortgagor in advance of the date when performance by the mortgagor is required. Also, banks have substantial expenses which are properly attributable to their corporate trust departments as a part of the general expense of maintaining an audit control system over securities held in vault.41

It is apparent that corporate trustees have substantial duties and substantial possible liabilities even prior to default; and that serious questions often arise as to the proper construction of the indenture. It is true that a trustee is entitled to advice of counsel, at the expense of the issuing corporation; but it is the duty and responsibility of the trustee itself to decide doubtful questions.“

40 See Harvey v. Guaranty Trust Co., 134 Misc. 417; 236 N. Y. Supp. 37 (Sup. Ct. 1929), discussing at length the corporate trustee's liability for wrongfully satisfying the deed of trust; also 7 Fletcher, Cyclopedia Corporations (Perm. Ed. 1931) § 3197.

41 A valuable discussion as to the functions of corporate trustees and the set-up and administration of a large corporate trust department may be found in Page and Gates, The Work of Corporate Trust Departments (1926). See also Herrick, Trust Departments in Banks and Trust Companies (1925), 263 et seq., and the suggested readings at pp. 274-275.

42 The Report, at 68, states: "Indeed, it is no exaggeration to say that corporate trustees have been able to remain inactive and to perpetrate the acts which we have heretofore described, because astute lawyers have been able to shield them generally from liability for negligence and all acts or failures to act except for fraud or gross negligence." (Italics added.) This statement is not correct because immunity clauses do not protect a trustee in acting beyond the powers conferred upon it by the indenture. Hazzard v. Chase National Bank, 159 Misc. 57, 287 N. Y. Supp. 546 (Sup. Ct. 1936): Doyle v. Chatham & Phenix National Bank of the City of N. Y., 253 N. Y. 369, 380-381, 171 N. E. 574, 578-579 (1930). Frequently the question presented to the trustee is one of power.

In some instances a trustee may appeal to a court of equity for instructions concerning its powers or duties i. e., when there is an ambiguity in the provisions of a trust deed concerning the trustee's powers or duties or if for other compelling reasons doubt arises as to the character or extent of such powers and duties. 2 Jones, Bonds and Bond Securities (4th Ed. 1935) §1046; Norfolk Southern Ry. v. Guaranty Trust Co., 13 F. (2d) 979 (C. C. A. 4th, 1926); Old Colony Trust Co. v. City of Wichita, 123 Fed. 762 (C. C. Kan. 1903), aff'd 132 Fed. 641 (C. C. A. 8th, 1904); Guardian Trust Co. v. White Cliffs Portland Cement & C. Co., 109 Fed. 523 (C. C. Ark., 1901); N. J. Nat. Bank & Trust Co. v. Lincoln Mortgage and Title Guaranty Co., 105 N. J. Eq. 557, 148 Atl. 713 (Ch. 1930). The right to appeal for instructions is not, however, without its limitations. In City Bank Farmers Trust Co. v. Smith, 263 N. Y. 292, 295, 189 N. E. 222, 223 (1934), which was a case involving a testamentary trustee, the court held that trustees are not entitled to instructions with reference to questions relating to the administration of a trust where there is room for the exercise of choice or where they are authorized to exercise their discretion. Nor will courts advise trustees upon purely business questions. Matter of Wander, 141 Misc. 584, 252, N. Y. Supp. 813 (Surr. Ct. 1931); Matter of Weisman, 140 Misc. 360, 363, 250 N. Y. Supp. 500, 502 (Surr. Ct. 1931). A corporate trustee in New York may have a determination of its duty by refusing to take requested action and having the matter submitted to the Appellate Division of the Supreme Court under §546 of the Civil Practice Act. This has been done in several instances

After default, the indentures usually provide that the trustee may take action (declaring due the principal sum not yet due by the terms of the bond, entry, foreclosure by advertisement, foreclosure by suit in equity, the obtaining of a money judgment, and otherwise) without the request of the holders of any specified percentage of the bonds, and that it shall be required to take such action upon the request of such percentage and upon the furnishing to the trustee of indemnity, if so required by it, against its expense and possible liability in complying with the request. The manner of performance by corporate trustees of their duties after default is too large a subject to be summarized, but the subject has been extensively discussed in legal publications previously referred to and to some extent is hereinafter considered.

Corporate trustees perform other services, before and after default, which it is unnecessary to detail; and these services may change with changing conditions. An example is the situation which has arisen from the advent of reorganization proceedings under Section 77 43 and Section 77B 4 of the Bankruptcy Act. Section 77, sub-section (c), paragraph (7) provides that trustees under indentures may file claims on behalf of the securities outstanding under the indentures, but that "nothing herein shall constitute such trustee or trustees the representative or representatives of such holders for the purpose of accepting or rejecting any plan of reorganization." Under Section 77B, which contains no similar provision, it has been indicated by the Circuit Court of Appeals for the Second Circuit, in the Allied Owners' Corporation case,45 that the trustee cannot vote on behalf of the bondholders for or against the plan. Nevertheless, corporate trustees have, and perform, important functions in reorganization proceedings.46 Sections 77 and 77B undoubtedly contemplate that the views of the bondholders with respect to a plan shall be expressed by them. However, there may be circumstances under which the trustee should be heard.

In a simple case, no great difficulty will arise; but a trustee, without the advice of experts, usually cannot express views, or even have them, in a complicated situation where the fairness of the plan depends upon such facts as the true value of the security for the bonds. In the case, for example, of a large railroad system, the expense of employing experts would be very substantial. The law has not defined the extent to which the trustee may incur such expenses and be reimbursed therefor. The right to compensation even for its own services in reorganization proceedings has been rather narrowly limited to services in aid of the reorganization, as distinguished from services for the exclusive benefit of a particular class of security holders.47 In an unreported opinion, the judge in charge of a large railroad reorganization has declined to give instructions to a trustee as to the extent to which it should incur expense in connection with hearings upon the proposed plan.48 It is reported in the press 19 that the Interstate Commerce Commission is considering making some general provision for trustees' expenses in Section 77 proceedings; and doubtless the subject will be clarified generally by See, for example, Irving Trust Co. v. Hughes, 239 App. Div. 74, 264 N. Y. Supp. 737 (1st Dep't 1923); Tucker v. Empire Trust Co., 242 App. Div. 380, 274 N. Y. Supp. 895 (1st Dep't 1934). In a proper case such determination could be had, also, from the Supreme Court by way of declaratory judgment under $473 of the Civil Practice Act. City Bank Farmers Trust Co. v. Smith, 263 N. Y. 292, 189 N. E. 222 (1934) (acknowledging the right but denying it under the circumstances). However, mortgagors naturally oppose the delay and expense of such proceedings and trustees usually do not insist upon them unless the risk is large.

43 On the subject of reorganization under Section 77, see Rodgers and Groom, Reorganization of Railroad Corporations under Section 77 of the Bankruptcy Act (1933), 33 Columbia Law Rev. 571; Weiner, Reorganization under Section 77: A Comment (1933), 33 Columbia Law Rev. 834; Lowenthal, The Railroad Reorganization Act (1933), 47 Harv. L. Rev. 18; Douglas, Protective Committees in Railroad Reorganizations (1934), 47 Harv. L. Rev. 565; Friendly, Amendment of the Railroad Reorganization Act (1936), 36 Columbia Law Rev. 27; Sunderland, Railroad Reorganizations (1935), an address before the National Conference on Debtor Relief Laws on December 7, 1935 and privately printed.

44 On the subject of reorganization under Section 77B, see Gerdes, Corporate Reorganizations (1936); Weiner, Corporate Reorganizations: Section 77B of the Bankruptcy Act (1934) 34 Columbia Law Rev. 1173; see Note, Developments in the Law-Reorganization Under Section 77B of the Bankruptcy Act-1934-1936 (1936) 49 Harv. L. Rev. 1111. See also Sunderland, A Brief Sketch of the Historical Background and of the Events Leading Up to the Enactment of the New Corporate Bankruptcy Reorganization Act (1934), 1 Corporate Reorganizations 4, 46.

45 In re Allied Owners' Corp., 74 F. (2d) 201 (C. C. A. 2d, 1934). That decision affirmed an order denying the motion of the trustee to be allowed to vote on behalf of all bondholders upon a proposed plan of reorganization. The court held that the trustee could not vote on behalf of bondholders who were represented in the proceeding by a committee. It reserved the question whether the trustee should be permitted to vote as representing absent bondholders who had not exercised their privilege of voting. However, the opinion indicates that the trustee has no power to substitute its judgment for that of the real creditors; and upon this point it is followed in Bitker v. Hotel Duluth Co., 83 F. (2d) 721 (C. C. A. 8th, 1936).

46 See Israels, The Mortgage Trustee in Reorganization Proceedings (1936), 2 Corporate Reorganizations 409. 47 In re The Memphis Street Railway Co., C. C. H. Bankruptcy Service 14052 (C. C. A. 6th, June 4, 1936). See also Teasdale v. Sefton National Fibre Can Co., 85 F. (2d) 379 (C. C. A. 8th, 1936).

42 See printed record, in the Matter of Missouri Pacific R. R. (E. D. Mo. 1936) Vol. VII, 3277. 49 N. Y. Times, Sept. 25, 1936.

judicial decisions or by legislation.50 However, the trustee is presently in the position either (1) that it may be subjected to criticism for not participating in proceedings regarding the plan, which often it cannot do without being fully advised after large expenditures of time and money, or (2) that after having rendered extensive services and incurred large expenses it may find the court holding that it cannot be reimbursed out of the estate because its services and expenses were not of such nature or amount as to be compensated for in reorganization proceedings. It is probable that in such a case it could recover its reasonable compensation and expenses under the general lien conferred upon it by the indenture,51 but the author is aware of no decision directly so holding in respect of services rendered in Section 77 or Section 77B proceedings, 52 and, further, there is no present method of determining reasonableness. It seems hardly just to expect the trustee to expend its moneys without regard to whether or not such moneys can be recovered. These questions are presently receiving extensive consideration by trustees and their counsel. Quite recently a trustee in three cases has called meetings of its bondholders and requested their views as to the steps which should be taken in railroad reorganization proceedings.53 This procedure may be wise and proper; but it does not solve the main question whether the trustee, as a bank, should advance substantial amounts upon the hope that it will recover them. Nevertheless, the current practice is for trustees to scrutinize reorganization plans and to intervene in reorganization proceedings; and in several instances they have objected to plans as unfair to their security holders.54

2. CRITICISMS OF THE EXISTING SITUATION

These criticisms appear in some cases to be based upon misunderstanding of present corporate trustees' obligations (whether or not amounting to legally enforceable duties), in other cases upon manner of performance of their obligations, and in still other cases upon the existing limitations of their legally enforceable duties.

In the report it is stated that control over the issuer's performance of its obligations with respect to bondholders "has been surrendered to or assumed by the trustee", that the trustee has been invested with the power "to do everything upon which the protection and enforcement of the security of a bondholder depends" and that "Both in law and in practice, this reliance of the security holder upon the trustee for protection of his investment is complete", 55 also that corporate trustees do not exercise the elaborate powers under modern trust indentures "which are the bondholders' only protection; that they have taken virtually all of the powers designed to protect the bondholders, but have rejected any duty to exercise them." 56

These statements indicate a misconception. Corporate trustees do not and could not assume any function to control the issuer's performance of its many

50 The existing situation is noted by the Report in stating, at 66, that it is desirable that "the status of indenture trustees in bankruptcy and receivership proceedings be made explicit both as to their powers to represent bondholders and as to their right to be compensated for the services which they may render in such proceedings in their representative capacity."

51 Corporate mortgages usually contain a provision that the trustee shall have a prior lien for its compensation and expenses. Such a provision is enforceable. Fidelity Trust Co. v. Hutchinson Chemical & Alkali Co., 221 Fed. 63 (C. C. A. 8th, 1915). Even without such a provision it has been held that the trust fund must bear the expenses of its administration. Trustees v. Greenough, 105 U. S. 527 (1881); Jessup v. Smith, 223 N. Y. 203, 119 N. E. 403 (1918); Perry, Trusts and Trustees (7th Ed. 1929) §907.

52 An intimation that the trustee could recover under the trustee's lien conferred by the mortgage is contained in the unreported opinion in the Missouri-Pacific case, supra note 48. In Fidelity Trust Co. v. Hutchinson Chemical and Alkali Co., 221 Fed. 63 (C. C. A. 8th, 1915), where a trustee's lien was conferred by the indenture, it was held that the expenses of the trustee and its counsel in a suit for the foreclosure of the mortgage should have been charged upon the proceeds of sale and not against the bondholders at whose instance the suit was brought. In that case, the trustee was performing a clear duty under the mortgage. The decision is applicable to reorganization proceedings if the services performed by the trustee are within the scope of its duties; but in advance of judicial determination of the duties of trustees in Section 77 and Section 77B proceedings, the question whether particular services are within such duties is not settled.

53 These meetings were called by Guaranty Trust Company of New York in The Denver and Rio Grande Western Railroad Company case (see N. Y. Herald Tribune, Sept. 18, 1936, N. Y. Times, Sept. 25, 1936), and in the New York, Westchester & Boston Railway Company case (see N. Y. Times, Oct. 20, 1936), and in the Chicago, Indianapolis and Louisville Railway Company case (see N. Y. Times, Nov. 16, 1936).

54 Instances of such objections, whether formal or informal, may be found in the reorganization proceedings affecting Chicago and Eastern Illinois Railway Company, Missouri Pacific Railroad Company and Prudence-Bonds Corporation. Many of the railroad reorganization proceedings have not reached the stage where objections by trustees are appropriate.

55 Report, at 3. In Hazzard v. Chase National Bank, 159 Misc. 57, 83, 287 N. Y. Supp. 541, 569 (Sup. Ct. 1936). The court said that, "Prospective investors are unquestionably induced to purchase debentures, to a great extent, by the name and prestige of the trustee, which are capitalized by the obligor seeking financing, in order to sell its securities"; and that by the investors "Reliance is placed almost completely upon the belief that the experience, power, financial acumen and integrity of the trustee will serve as a protection." (Italics added.) In the cases cited supra note 12, the Hazzard opinion is approved and statements are made which are somewhat similar to the statement just quoted from the Hazzard case.

6 Report, at 4.

Securi

general obligations to bondholders (such as the obligation adequately to maintain the property or to comply with negative pledge clauses). Nor is the reliance of the security holder upon the trustee in any sense "complete" or even primary. Any person familiar with the selling of securities would say that, although the name of a reputable trustee may aid the standing of the issuer, investors ordinarily do not otherwise rely to any important extent upon the trustee. ties issued by borrowing corporations under corporate indentures are marketed in almost all cases by houses which may be termed generally "investment bankers" 57 or "underwriters" or "sellers." Investors extend credit primarily upon the trust estate, if there be one, and the management of the issuing corporation.5 58 Investors rely also to a very substantial extent upon the sellers of the securities.59 This fact is recognized, at one point at least, in the Report.60

The Report contains criticisms which are unjust because they imply that corporate trustees fail to exercise functions which, although not legally enforceable duties, they should exercise. For example, in the Report, in connection with negative pledge clauses and the substitution of collateral, it is stated that "A good deal of the fault for inadequate protection of investors may be traced to passivity on the part of the trustees at the time when the indenture is drafted"; that trustees and their counsel ordinarily do not examine the indenture in order to insure protection of the security holders; and that "There is nothing in the law requiring them to do so. And if they insisted that indentures contain provisions for the protection of bondholders, it may be guessed that the business which they obtain from issuers and bankers would decline."'61

While the Report thus recognizes that trustees do not have the duty to examine indentures in order to protect investors, the implication is that they should do so; and that they do not do so because they fear loss of business by so doing. Such an implication is not a fair one. The trustees are not the sellers of the securities, nor do they profit from the sale thereof except to the very limited extent of their trustees' fees. They have only a "slight financial interest in the transaction."'62 It is the seller who should see that the securities sold are issued under

an indenture which is not deceptive or otherwise improper.

The Report also criticizes a trustee because in a case of substitution of collateral the trustee, as well as the issuer and the underwriter, failed to protect investors "from the breadth and flexibility of the substitution clause" and "failed to give any notice that the securities advertised as originally deposited might be withdrawn." 63 The statement that the trustee "failed" implies that it had an obligation. There is no such obligation on the part of the trustees; but such obligation has already been legally imposed upon sellers by the Securities Act of 1933. Prospectuses may not, without severe penalties, contain material misstatements or have material omissions. A prospectus not containing a proper statement as to the possibilities of substitution of collateral or an adequate description of negative pledge clauses would certainly have material omissions.

The Report also implies that corporate trustees do not properly perform existing obligations because in many cases they fail to take action after default without the request of the holders of the percentage of the securities which is required to compel action-it being stated that "instances of trustees taking such action,

57 Upon the general subject of the issuance and sale of securities, see Willis and Bogen, Investment Banking (unpublished). The authors describe the extensive organization of investment bankers, their analysis of borrowers' capital needs and of market conditions, their extended examination into the security for issues offered to them, their methods of distribution and sale, their close following of the management of issues which they have placed, and generally the various elements which affect the purchase and sale of securities. 58 Willis and Bogen, op. cit supra note 57, point out that the investor's risk depends largely on the financial policy of the management of the borrowing corporation; that if the corporation builds up reserves, adequately maintains its property and pays dividends only after these requirements have been fulfilled "it is placing a cushion of financial strength between itself and its security holders"; but that "the ordinary risks of the enterprise are multiplied many times over by a policy of alternatingly over-paying dividends and sharply retrenching for the purpose of physical rehabilitation."

59 In Willis and Bogen, op. cit supra note 57, it is stated, with reference to so-called investment bankers or houses of issue, that they are much concerned with the borrowers' management and keep closely in touch with it; and that "some investors place much stress, in purchasing securities, on the character and reputation of the house of issue." Although this book contains a very full discussion of the purchase of securities (see particularly chapters xvii, xviii and xix) there is not a single reference to reliance by buyers upon the trustee named in the indenture. Furthermore, the authors refer to Standard Statistics Corporation as rating bonds on three fundamental factors, viz., "earning power, asset value and marketability." The authors also refer to the somewhat more elaborate rating guides of the Moody Investors' Service, but no reference to corporate trustees can be found therein. See also Babbitt v. Read, 236 Fed. 42 (C. C. A. 2d, 1916).

60 Report, at 105: "In the minds of bondholders, default itself creates distrust and suspicion of the houses which originated and sold the bonds. Not much is required to fan this feeling of growing distrust and suspicion into a blazing fire of resentment against the houses of issue which may result in adverse publicity, litigation, and damage to any future business."

61 Report, at 7-9.

62 See Benton v. Safe Deposit Bank, 255 N. Y. 260, 261, 174 N. E. 648, 650 (1931).

63 Report, at 20.