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TUESDAY, JUNE 15, 1937


Washington, D. C. The subcommittee met, pursuant to call, at 10:30 a. m., in the Banking and Currency Committee room, Senate Office Building, Senator Robert F. Wagner (chairman of the committee) presiding.

Present: Senators Wagner (chairman), Hughes, Townsend, and Frazier.

Also present: Senator Alben W. Barkley; Mr. William 0. Douglas, a Commissioner of the Securities and Exchange Commission, Washington, D.C. The CHAIRMAN. Commissioner Douglas.

Commissioner Douglas. May I offer for the record an analysis of S. 2344 which was prepared by the staff of the Securities and Exchange Commission?

The CHAIRMAN. Yes; we shall have that put into the record. (The analysis referred to is as follows:)



The following is a detailed analysis, section by section, of the Trust Indenture Act of 1937 (S. 2344) introduced by Senator Barkley on May 6, 1937, and referred to the Committee on Banking and Currency. It is understood that a confidential committee reprint, showing certain changes which have been suggested since the introduction of the bill, has been prepared and is now in the hands of the committee. Attention will therefore be called in this analysis to the changes which have been suggested and the reasons for such changes.


The bill is given the short title of the Trust Indenture Act of 1937. The change which has been made in the long title is designed merely to call attention to the fact that the bill is based not only on the commerce power but also on the mail power.


Subsection (a) contains an enumeration of the conditions which necessitate Federal regulation, in the interests of investors and in the national public interest, of public offerings of notes, bonds, debentures, and evidences of indebtedness, through the use of means and instruments of transportation and communication in interstate commerce and of the mails.

In the committee reprint the manner of presentation of the facts necessitating Federal regulation has been improved. In the following discussion, which is based upon paragraphs (1) to (5), inclusive, of subsection (a) of the committee reprint, attention will be called to the changes which have been made. 151514376


(1) This paragraph emphasizes the necessity of having a trustee to represent the interests of bondholders. Reference was made, in the former paragraph (3), to the fact that concerted action by bondholders was impeded by managementinvestment banker control of bondholders' lists. In the new paragraph reference is also made to the obvious impracticability of individual action.

(2) This paragraph is a revision of paragraph (2) of the original subsection (a). The necessity that the trustee have adequate rights and powers and adequate duties and responsibilities with respect to the protection and enforcement of the rights of the bondholders was mentioned in the original paragraph. The second clause of the revised paragraph puts into concrete terms what was covered by general statement in the original paragraph. This clause also refers to the general and reasonable assumption by investors that the trustee is under an affirmative duty to take action for the protection and enforcement of their rights, an assumption which is certainly incorrect under the form of trust indenture in common use. This is the idea intended to be conveyed by the matter eliminated from the original subsection (b).

(3) In the second clause of the former paragraph (1), mention was made of the necessity that the trustee have resources commensurate with its responsibilities and that it not have any relationship to, connection with, or interest in the obligor or any underwriter of its securities which involved a material conflict, actual or potential, with the interests of the bondholders.

(4) This paragraph, which is substantially the same as the former paragraph (3), has reference to the fact that trust indentures generally fail to require the obligor to furnish to the trustee and to the bondholders adequate current information with respect to its financial condition, and fail to provide machinery for the transmission of such information to the bondholders.

(5) This paragraph answers the natural question why bondholders have not taken steps to protect themselves by insisting upon the inclusion of adequate protective provisions in trust indentures. The explanation given is that trust indentures are commonly prepared by the obligor or underwriters, and that the fact that the securities are publicly offered (the very fact which brings them within the scope of the act) makes bondholder participation in the drafting process impracticable, even if they understand the problem.

Subsection (b) states that abuses of the character enumerated in subsection (a) have been so wide-spread and have occurred in a sufficient number of instances that the public offering of such securities, unless regulated, is injurious to the capital markets, to investors, and to the general public. This section also declares the general policy of the act to be to meet these problems and eliminate these evils connected with the public offering of such securities by the use of means and instruments of transportation and communication in interstate commerce and of the mails.


As will appear from the discussion of section 3 of the act, an application for the "qualification” of an indenture under which securities are to be issued will, with few exceptions, be accompanied by registration of the securities themselves under the Securities Act of 1933, and so far as possible the Securities Act procedure has been followed. Accordingly, paragraph (1) of section 2 of this act provides that any term defined in section 2 of the Securities Act, as heretofore amended, and not otherwise defined in the Trust Indenture Act, shall have the meaning provided in section 2 of the Securities Act. Thus the Securities Act definitions of "security" and “issuer”, among others, are carried over into this act.

In addition, section 2 of the Trust Indenture Act contains definitions of 15 terms used throughout the act, such as sale, underwriter, director, executive officer, indenture, and voting security.

"Sale" (2) is defined in the same terms as in section 2 (3) of the Securities Act, with the exception mentioned in the latter part of the paragraph. The reason for this exception can best be illustrated by an example. If, as is not an uncommon practice in the case of real-estate mortgages, the mortgagor executes an ordinary bond and mortgage to a trust company, receiving in exchange “certificates of participation” in such mortgage which he then sells to the public, this transaction is held, under the Securities Act, to involve a public offering not only of the certificates, but of the underlying bond. But for the exception made in this paragraph, it would be necessary that the underlying bond, as well as the certificate of participation, be issued under a trust indenture with a qualified trustee. The exception does not apply if the eventual distribution of the underlying bond or bonds to the purchasers of the certificates is contemplated, as where the certificates are by their terms convertible into such bonds.

“Underwriter" (3) is defined in exactly the same terms as in section 2 (11) of the Securities Act except that the last sentence of the Securities Act definition is omitted. Under that sentence, a person who undertakes the public distribution of a block of outstanding securities for a controlling stockholder of the issuer is held to be an underwriter, just as though he were distributing for the issuer itse.f, and registration was required. The elimination of the sentence in question makes it unnecessary in this situation to “qualify” under this act the indenture (if any) under which such outstanding securities were issued.

“Director” (4) is defined in substantially the same terms as in section 3 (a) (7) of the Securities Exchange Act of 1934.

"Executive officer” (5) is a term used primarily in section 7 (b) of the act.

"Indenture” (6) means any mortgage, deed of trust, trust, or any other indenture or similar instrument or agreement, whether or not secured, under which securities are outstanding or are to be issued. The term includes any supplement or amendment to any of the foregoing.

"Indenture to be qualified” (8) means the indenture in respect of which a particular application is filed, and the next four terms are defined with reference to that indenture. Through this device, the language of section 7 has been considerably simplified.

"Indenture trustee” (9) means each trustee under the indenture to be qualified and ea successor trustee.

"Indenture security” (10) means any security issued or to be issued under the indenture to be qualified.

The definition of the term "security holder” contained in the former paragraph 11 has been eliminated as being unnecessary, and the succeeding paragraphs of the original bill have been renumbered. The paragraph references for the following definitions are those of the committee reprint.

“Obligor" (11) means every person who is liable upon a security issued or to be issued under the indenture to be qualified. In the case of certificates of interest or participation, the term includes persons liable upon the security or securities in which such certificate evidences an interest or participation. This provision is of particular importance in connection with the prohibitions against conflicting interests, for in the case of such certificates it is the indenture trustee's interest in or connection with the obligor upon the underlying security which really matters. The last clause of the paragraph is intended to make clear that the trustee under an equipment trust is not itself to be regarded as an obligor, merely by reason of the fact that it agrees to pay over to the equipment trust certificate holders rentals received from the lessee of the equipment. The reference in the committee reprint, to equipment trust certificates “or like securities” brings this provision into line with a similar expression used in section 2 (4) of the Securities Act.

Voting security” (15) means a security presently entitling the holder or owner thereof to vote for the election of directors. For the purposes of the prohibitions against conflicting interests, potential voting power, or voting power temporarily in suspense, is comparatively unimportant.

“Securities Act of 1933” (17) is to be deemed to refer to such act, as heretofore or hereafter amended. Where, in various portions of the act, the intention is to incorporate provisions of the Securities Act as they now stand, regardless of future amendments, specific reference is made to the Securities Act of 1933 “as heretofore amended." Wherever this is done, attention will be specifically called to that fact. The purpose is to prevent the inadvertent dislocation of provisions of this act by reason of future amendments of the Securities Act. A similar provision is made with respect to the “Securities Exchange Act of 1934” and “Public Utility Holding Company Act of 1935.”


Subsection (a) exempts certain securities from the provisions of the entire act. Under the original subsection, the exemption was restricted to the provisions of section 4. The reference to "classes of” securities has been eliminated in order to avoid possible conflict with the provisions of section 8 (a) of the committee reprint, which would authorize the Commission to define the term "class of securities."

(1) This is the provision which limits the applicability of the act to notes, bonds, debentures, or evidences of indebtedness, or certificates of interest or participation in, temporary certificates for, or guaranties of any of the foregoing. The insertion in the committee reprint of the words “and other than” is merely a clarifying change. On principle, certificates of interest or participation of the character referred to in the discussion of section 2 (2) of the act should be subject to the provisions of the act. Practical considerations also demand their inclusion, for adop

tion of the certificate of interest device would provide too easy a method of avoiding the requirements of the act. The specific mention of these types of security, and the failure to mention other types specifically mentioned in the definition of the term "security contained in section 2 (1) of the Securities Act and incorporated by reference in this act (such as interim certificates and certificates of deposit), makes clear that such other types of security are exempted from the provisions of this act.

(2) This paragraph, in effect, limits the meaning of the term "certificate of interest or participation” to the general type of certificate referred to in the discussion of section 2 (2). It would exempt, for example, fixed trust certificates evidencing an interest in an assorted batch of bonds.

(3) This paragrapn takes the place of a provision as to the date on which the act is to become effective. The same device was used in section 3 (a) (1) of the Securities Act, and this paragraph follows the language of that section. The "effective date” thus fixed is now January 3, 1938.

(4) The effect of this paragraph is to exempt from the provisions of this act all securities exempted from registration under the Securities Act, with the two exceptions noted below. The category thus exempted includes governments and municipals, securities of National or State banks, short-term commercial paper, securities of eleemosynary institutions and building and loan associations, rails, receiver's certificates, and insurance policies.

The two exceptions are securities issued in exchange for other securities of the same issuer, and securities issued under a plan approved by a court, which are exempted from the Securities Act by sections 3 (a) (9) and 3 (a) (10) thereof. It may be reasonable to suppose, for the purposes of exemption from the disclosure requirements of the Securities Act, that one who already holds securities of a company which are to be exchanged for new securities is reasonably familiar with its affairs, but there is no reason why the indenture under which the new security is issued should not conform to the higher standards prescribed by this act. With respect to the failure to carry over the section 3 (a) (10) exemption, it should be noted that while courts may pass on the fairness of the reorganization plan under which securities are issued, they do not commonly examine the trust indenture.

The distinction thus taken indicates why, in this paragraph, reference is made to the Securities Act of 1933, as heretofore amended. It is quite possible that future amendments of the Securities Act will exempt from the operation of that act securities which, for similar reasons, are not entitled on principle to an exemption from this act.

Although securities issued by National or State banks are exempted from this act, it would not be possible for an issuer to evade compliance with this act by making a bond and mortgage to such a bank, and then causing the bank to issue certificates of interest or participation in such bond and mortgage. Similar questions have arisen under the Securities Act, and the Commission has ruled that the company itself, and not the bank, is the issuer of the certificates of participation under such circumstances. Such administrative interpretation of section 3 (a) (2) of the Securities Act would, of course, be controlling in the interpretation of this paragraph.

(5) This paragraph exempts securities issued under a mortgage indenture as to which a contract of insurance under the National Housing Act is in effect. Under that act the Federal Housing Administration has control over the form of such mortgage indentures, and the application of this act to such securities would result in an unnecessary duplication of function.

(6) This paragraph exempts any guarantee of any security exempted from the provisions of this act by subsection (a). If it is not necessary to comply with the indenture requirements with respect to the security itself, there would be little point in making such requirements applicable to a guarantee of such security, The change made in this paragraph by the committee reprint corresponds to that made in the opening sentence of subsection (a).

Subsection (b) in effect, restricts the applicability of the act to public offerings by issuers or underwriters, as under the Securities Act itself, transactions by dealers being covered only to the limited extent deemed reasonably necessary to prevent evasions. As has already been noted, the term "underwriter" is more narrowly defined under this act than under the Securities Act. The last sentence of this subsection is necessary in order to prevent persons who would be underwriters under the broader Securities Act definition from losing the exemption provided by this subsection. Here again the reference is to the Securities Act of 1933, as heretofore amended.

Subsection (c): The Commission may, by rule and regulation, exempt additional classes of securities publicly offered where the aggregate offering price does not exceed $250,000. The Securities Act maximum under section 3 (b) of that act was $100,000. The difference is accounted for by the fact that in the case of issues as small as $100,000, the advantages of requiring a trustee are not commensurate with the expense necessarily involved, since the limited number of security holders makes individual action less impracticable.

Subsection (d): Under this subsection the Commission is authorized, on application by the issuer and after opportunity for hearing thereon, to exempt from the act offerings of additional securities issued under trust indentures executed prior to the effective date of the act, if certain conditions are shown to exist. This exemptive power may be exercised with respect to any one or more provisions of the act, but only to the extent that the Commission finds that compliance with such provisions, through the execution of a supplemental indenture or otherwise, would require the consent of the holders of securities outstanding thereunder or would impose an undue burden on the issuer, having due regard to the public interest and the interests of investors. It will be noticed that compliance with many of the provisions of the act could not conceivably be regarded as necessitating the consent of the holders of outstanding securities, and the necessary basis of Federal jurisdiction existing, there is no reason why the issuer should not be made to comply to that extent with the required standards, particularly in view of the safeguard provided by paragraph (2) of this subsection.


Subsection (a) in effect, requires that all securities, the public offering of which is subject to the act, be issued under an indenture as to which “qualification” is effective. It prohibits, in language substantially similar to that of section 5 of the Secruities Act, the use of means or instruments of transportation or communication in interstate commerce or of the mails to sell any such securities or to deliver the same after sale.

Subsection (b) postpones the effective date of registration under the Securities Act until qualification has become effective as to the indenture under which the security is issued.


This section establishes machinery for the qualification of an indenture which is not unlike the registration machinery of the Securities Act, sections 6, 7, and 8 thereof.

Subsection (a) requires that an application for qualification be filed by the issuer, as under section 6 (a) of the Securities Act. The application must contain such of the information and documents which would be required to be filed in order to register the security under the Securities Act, and such additional information as the Commission may by rules and regulations prescribe. The last sentence of the subsection provides that the information and documents so filed shall be available to the public under such regulations as the Commission may prescribe. This provision is identical with section 6 (d) of the Securities Act.

Subsection (b): The provisions of this subsection with respect to the filing of applications and of amendments thereto are substantially similar to those of section 6 (c) of the Securities Act, except that the Commission is given some discretion as to the medium of payment of the filing fee, where a filing fee is payable. If a registration statement under the Securities Act covering securities issued or to be issued under the indenture has been filed prior to, or simultaneously with, the application, no filing fee is payable under this act. In all other cases, a filing fee of $100 is payable; but if a registration statement under the Securities Act is subsequently filed, the amount so paid is to be credited against the filing fee payable under the Securities Act, and any excess is to be returned to the applicant. As under section 8 (a) of the Securities Act, the filing of an amendment to an application prior to its effective date has the effect of postponing the effective date, unless the amendment is filed with the consent of the Commission and pursuant to an order of the Commission. Amendments after the effective date may be made on such terms and conditions as the Commission may prescribe.

Subsection (c): An application for qualification becomes effective 20 days after the filing thereof (the same period as prescribed by sec. 8 (a) of the Securities Act), unless the Commission issues an order to show cause why the application should become effective. If a show cause order is issued, an opportunity for hearing thereon must be given within 10 days, and the application becomes

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