good in theory, but practicably it is of little, if any, value. In any ordinary case the trustee would not know of the violations until after the harm had been done, unless which would be most unreasonable-the trustee should be supplied with funds from which through its experts to follow continuously the performance by all such issuers of their covenants. Nor is it apparent how the trustee could require an issuer to get back assets which it had effectively pledged in violation of its covenant, or could force the issuer to reacquire assets with which it had parted; and after the issuer had reached such a condition as to be violating its covenants a suit for damages would not be an effective remedy. Elimination or strengthening of negative pledge clauses would be helpful; but the main reliance of investors must be, as in the case of credit transactions generally, upon the standing of the issuer and not upon the hope that violations can be practicably prevented.

Recommendation (4) also proposes that the trustee be responsible for reasonable care in enforcing compliance with provisions for substitution and release of security and in taking appropriate steps to protect the security holders in the case of violation or threatened violation. The comments which have been made with regard to negative pledge clauses apply generally to this proposal. Very few cases can be pointed out wherein trustees have permitted the substitution or release of security except in accordance with the indenture provisions. This recommendation presents again the view, with which trustees might well agree, that useful improvements may properly be made in the language of many indentures. Recommendation (5) proposes that the trustee be responsible for the use of reasonable care in ascertaining the occurrence of defaults and giving notice to the security holders "where such notice is necessary for their protection." Unless the occurrence of defaults has come to the knowledge of the trustee in its relations with the company, the trustee cannot know of defaults unless it incurs the great expense of checking by experts the performance by the company of the many covenants usually contained in a modern indenture. The Report itself recognizes 121 that "No rigid and inflexible rule can be prescribed"; and the utility of such a vague recommendation is debatable at best.

Recommendation (6) proposes that the trustee, after default, be responsible for failure to take such action for the protection of the security holders as is "reasonably necessary" for their protection. If an attorney were asked to advise a trustee as to what financial risks it would incur in accepting the trust under an indenture containing such a provision, he would be unable to. Opinions of the various courts to which might be presented suits asserting a trustee's liability for noncompliance with this duty might vary in as many different ways as there are different judges. In respect of this recommendation, also, the Report is completely lacking in any proposal that the trustee should have the right to rely upon the opinion of counsels elected with reasonable care. Reference has been made above to the decisions holding that indenture provisions contemplating the request of the holders of a stated percentage of the bonds are wise and proper and are inserted for the benefit of the security holders themselves.122 These decisions bring out clearly the difference between the generally accepted view that the stipulated percentage ordinarily should concur in action which may seriously affect the common security and the view so frequently indicated by the Report and embodied in recommendation (6), that trustees after default should substitute their judgment for that of the security holders who are the owners of the investment and as such have the right to exercise their own judgment. Indeed, it may well be doubted whether investors such as life insurance companies or savings banks would consider it proper that the power which they have to make such decisions be transferred to the trustee.123

In the body of the Report, it is stated 124 that "the trustee could well be expected to scrutinize the provisions of a reorganization plan, to see that it is fair and that it provides adequate protection to minorities." Most of the trustees under large issues are presently scrutinizing to some extent such plans-from the point of view of all bondholders, minorities as well as majorities. However, the Report itself recognizes 125 that they cannot be expected to participate fully until their status and their right to financial protection shall be clarified and established. Even then there is much doubt as to how extensively trustees should duplicate the labor and expense of efficient committees or other large groups which are endeav

121 Id. at 42.

122 See supra note 68.

123 As is pointed out in Sunderland, op. cit. supra note 43, at 21, life insurance companies and savings banks are themselves "fiduciaries."

124 Report, at 63.

125 Id. at 66.

oring in good faith to bring about the best results for the bonds, and generally as to how far trustees should undertake investors' functions. The Commission also suggests 126 that in the case of "voluntary reorganizations," that is, reorganizations outside of court proceedings, "the trustee should be expected actively to represent the minority in negotiating a plan." Many of the comments which have just been made apply to this suggestion but, because of the absence of any such authority as is implied by Sections 77 and 77B, it is much more doubtful that the trustee has any functions in connection with the "negotiating" of a plan of voluntary reorganization.

It is not here suggested that the existing situation cannot be improved. Particularly well founded are the comments in the Report as to the weakness of indenture provisions and the desirability that they be improved. As has been stated above, this might be done by consultation of indenture experts with the Commission and by the agreement of the trustees to require such provisions as should be determined to be proper. It may well be also that trustees might properly perform some further duties. But the proposers of legislation for the enlargement of trustee duties should proceed, in a matter so vitally important, with great care and only after full consultation with the best qualified representatives of corporate trustees, of borrowing corporations, of investment bankers, and of investors all of whom, by reason of long experience, can give valuable practical help. It may well be, although the author has no information upon the subject, that this is the procedure contemplated by the Commission.

We will have an executive committee meeting of the subcommittee which has this bill under consideration on next Tuesday at 10:30 a. m. (Whereupon, at 4:45 p. m., the hearing was concluded.)

126 Id. at 63.

REGULATION OF SALE OF SECURITIES

TUESDAY, JUNE 29, 1937

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON

BANKING AND CURRENCY,

Washington, D. C. The subcommittee met, pursuant to adjournment on Tuesday, June 22, 1937, in the Banking and Currency Committee room, Senate Office Building, at 11:30 a. m., Senator Robert F. Wagner (chairman) presiding.

Present: Senators Wagner (chairman), Bulkley, and Townsend. Present also: Senators Barkley, Adams, Hitchcock, and Lodge. The CHAIRMAN. The committee will come to order.

Mr. Buttenwieser, we will be delighted to hear from you.

STATEMENT OF BENJAMIN J. BUTTEN WIESER, CHAIRMAN, INVESTMENT BANKERS ASSOCIATION OF AMERICA SPECIAL COMMITTEE ON TRUST INDENTURES; NEW YORK, N. Y.

The CHAIRMAN. Tell us your full name and address, and also your banking associations.

Mr. BUTTENWIESER. Benjamin J. Buttenwieser; residence, 17 East Seventy-third Street, New York. I am a member of the firm of Kuhn, Loeb & Co., 52 William Street, New York, but I come here as chairman of the Investment Bankers Association of America special committee on trust indentures.

The references in this memorandum, by the way, are to committee print no. 2, which was the only one available to me yesterday.

The Investment Bankers Association of America, through its special committee on trust indentures, desires to record its regret that through the absence of the committee's chairman in California on a business trip and the closing of public hearings on this bill at an earlier date than the special committee had anticipated, it was unable to express to the Senate committee at its public hearings the views of the association with regard to this bill. It therefore takes this means of now conveying these views to the committee.

As it is aware that various other organizations have presented to the committee their opinions of the bill from their own particular viewpoint, this memorandum of the Investment Bankers Association special committee will confine itself to consideration of the bill only from the standpoint of investment bankers and the investing public and corporate borrowers, the interests of all of whom the members of this association are solicitous of safeguarding, and not from the standpoint of any other parties affected by the bill.

The CHAIRMAN. May I interrupt you there long enough to ask you to tell us something about this association?

Mr. BUTTENWIESER. The Investment Bankers' Association of America is composed of practically all firms, corporations, and organizations carrying on the so-called investment-banking business, that is, the business of selling securities to the public through public offerings. Its membership, I should assume, is somewhere around four or five thousand firms throughout the country. It represents all sections of the country. and all categories of investment banking, that is, as differentiated from commercial banking, which is represented by the American Bankers' Association.

That, I think, broadly enunciates the difference between investment banking and commercial banking, and the two associations which represent each of those categories.

Does that explain it sufficiently?

The CHAIRMAN. Yes.

Mr. BUTTENWIESER. At the outset the association wishes to emphasize that, for the continued improvement of financing methods and standards and for the protection of investors, it heartily favors any legislation which will better serve and safeguard the important interests which the investment-banking business serves. Consequently it feels that certain provisions of the bill represent decidedly constructive and sound legislation.

However, the association equally feels that in certain other respects the bill is unsound, in that, through the very generality of some of its provisions, it delegates to the Securities and Exchange Commission powers far beyond what the association believes Congress would knowingly delegate to any administrative body of the Government and far in excess of the responsibilities which any such body should feel warranted in assuming.

Specifically we refer to section 7 (m) (1) and (3), page 40, lines 7 to 15 and 18 to 19, wherein it is stated that [reading]:

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 * * *restrictions or conditions on the release and substitution of any property subject to the lien of the indenture (and) on the issuance of additional indenture securities * * * (and) the definition of what shall constitute a default thereunder.

Senator ADAMS. May I ask you there, is it your understanding of this section of the bill-I may say, as a member of the committee, that I have not seen the bill before this moment-that the law as proposed would give to the Securities and Exchange Commission the right to fix the conditions in a deed of trust or an indenture controlling the manner in which property covered by the original instrument should be released, or under which substitutions could be made, and also could fix the definitions of what should constitute a default?

Mr. BUTTENWIESER. Yes; and particularly the issuance of additional indenture securities, in other words, the issuance of additional securities under that same indenture, or, in fact, the terms of the indenture when it is initially set up, as we read that section of the bill. Senator ADAMS. How does it reach that—by requiring the submission of the indenture to the Commission before it is executed, or by seeking to reserve the power to modify it after its execution?

Mr. BUTTENWIESER. Submitting it for qualification under the act, and, during that 20-day period, examining its terms, and, if they do