The more we consider the proposed legislation, the more convinced we are that it will prove to be a deterrent to public financing of securities and for that reason we feel that it would be most unfortunate to have it passed at the present time when such strong efforts are being made to bring about a business recovery.

In the past it has been necessary to work out an agreement between the company borrowing the money, the underwriters, and the trustee as to the terms of a bond issue and particularly as to the form of the trust indenture. Under the terms of the bill so many things are subject to the approval of the Securities and Exchange Commission that there is sure to be a real delay as well as an added difficulty in carrying through any corporate financing.

Another thing that impresses me strongly is that in view of the very large amounts which are involved, any bank or trust company acting as trustee will have to lean backward in considering possible liability and for that reason might feel obliged to take action in case of default which might not be for the best interest of the corporation or its security holders and which it would not have taken were it not for the fear of liability.

There does not seem to me to be any strong demand for this legislation at the present time and for that reason I would like to emphasize the suggestion which Mr. Edward E. Brown made in his testimony before the Senate committee to the effect that this proposed legislation is of such public interest that it deserves more complete exploration before it is incorporated into statutory law and to his further suggestion that if we are to have legislation at this time it might well be confined to the conflict features of the bill.

You, of course, have our permission to make this letter a matter of record with the committee.

Very truly yours,

WILLIAM S. MILLER, Vice President and General Counsel.

Mr. AMBERG. Then, if it is not too great an imposition, there has been a very excellent impartial legal and factual study made of this Barkley bill, the present bill, by Mr. Oscar W. Haussermann, of the Boston bar. It is a lecture he made in Boston. It is, I can assure you, an impartial, fair presentation of the issues, and I would like, with your permission and I have his permission-he is too modest to ask for it himself—to insert it in the record.

Mr. EICHER. How many pages are there?

Mr. AMBERG. About 32 pages.

Mr. BOREN. Do you have other copies of that?

Mr. AMBERG. I have not.

Mr. EICHER. Doubtless Mr. Haussermann could furnish us with more copies, so that each member of our committee could have one. Could you supply us with 27 copies?

Mr. HAUSSERMANN. I will be glad to do that.

Mr. EICHER. If you can do that, I will see personally that each member of our committee gets it.

Mr. AMBERG. Then that will avoid the necessity of putting it into the record.

Mr. EICHER. Just one more question, Mr. Amberg; Do I understand the purport of your three amendments, or Mr. Brown's three amendments, to be that if they were embodied within this bill, it would change its philosophy from the dominion to the full disclosure aspect?

Mr. AMBERG. No; not at all.

Mr. EICHER. Just one more question: Do you entertain any confidence at all, Mr. Amberg, that private corporate financing can by any possibility ever succeed in cleaning its own house without governmental assistance?

Mr. AMBERG. I certainly do. I have enough confidence in the integrity of the American people and their providence to believe that they can. That is not to say that some forms of supervision do not greatly help in preventing deliberate overreaching and fraud. Incidentally, in future days, if we all go speculatively haywire like we did in 1929, the investors are gone, regardless of laws.

Mr. EICHER. Mr. Amberg, I rather gather from your statement that you feel considerable alarm over the implications of the word "negligent" in line 17, page 38.

I assume you feel that it might in practically all circumstances be a jury question as to the damage liability on the part of trustees. Would you feel that should the word "negligent" be changed possibly to "willful closing of the eyes and ears of the trustee".

Mr. AMBERG (interposing). Yes; if this clause remains, but that is purely secondary, Mr. Chairman. In the present indenture the trustee naturally has sought the high degree of protection against charges of negligence. He has not done it because he has been unwilling to act, but he does not like to be chiseled at by a minority of security holders when most of them are satisfied.

Mr. Brown merely asked that inasmuch as the conduct of the trustee in the very technical matters was to be tested before a jury and not before a group of men familiar with these matters, it was just altogether too much and unfair to submit the trustee to the risks of going before a jury of laymen to have determined whether or not his conduct was negligent.

Mr. BOREN. You would add in there, on line 17, further language? Mr. AMBERG. I would strike No. 2. I do not care about it at all. A trustee has never been liable for an error of judgment. I would like to have it broadened and go back to principles such as Mr. Brown suggested in his testimony, that reasonable doubt as to negligence should be resolved in favor of the trustee, as proposed-the amendment submitted to the Senate.

Mr. BOREN. Would not your suggestion be answered here by adding in line 17, "it shall be proved beyond a reasonable doubt," or something like that, that he was negligent?

Mr. AMBERG. That would be helpful.

Mr. EICHER. Is it your idea that the whole paragraph (2) on page 38 reverses the common law burden of proof?

Mr. AMBERG. Possibly. The inferences are uncertain.

Mr. BOREN. If we strike that paragraph entirely out, without adding any new language, you think that would materially improve the bill?

Mr. AMBERG. No; it would not improve the bill from the point of view of the inordinate risks which it places on the trustee, which, incidentally, will as a practical matter make trustees reluctant to accept trusteeships except in cases where the prospect of future trouble is very slight and the fees relatively commensurate. Mr. EICHER. Thank you, Mr. Amberg.

Mr. AMBERG. Thank you.

STATEMENT OF FRED N. OLIVER, GENERAL COUNSEL FOR THE NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS, NEW YORK, N. Y.

Mr. EICHER. Mr. Oliver, will you give your name and address, and your occupation to the reporter?

Mr. OLIVER. Mr. Chairman, my name is Fred N. Oliver. I am general counsel for the National Association of Mutual Savings Banks, 60 East Forty-second Street, New York, N. Y.

There are 550 mutual savings banks in the country having assets of $11,000,000,000. Their investments are generally restricted by law to mortgages, Government and municipal bonds, public-utility bonds, and railroad bonds which meet certain investment tests. In some States investments in the better grade industrials are permitted. This bill would affect only the investments made in public-utility bonds and, in those States where such investments are permitted, in industrial bonds. Obviously, mutual savings bank officials are interested in any legislation which is designed to afford more adequate protection to investments of their depositors.

At the time the proposed legislation was being drafted by the Securities and Exchange Commission, an informal committee of savings bankers was appointed to study the measure and to confer with the Commission about it. Mr. Charles A. Miller, then president of the Savings Bank Trust Co., of New York, and now chairman of the board of that institution, is the chairman of the committee. The committee had several conferences with Chairman Douglas and his associates on various aspects of the bill as it was being developed.

The members of the committee are widely scattered. Due to the limited time available, I have been unable to get in touch with all members of the committee to obtain their views as to the measure in its present form. Consequently my appearance here is in my personal capacity.

I have gone over the measure with the chairman of the committee and he has approved the remarks which I shall make as well as two or three other members of the committee.

However, an appearance was made before the Senate committee and there is no apparent reason for any change in attitude with respect to the measure, nor is there any reason for me to restate in detail the testimony given at that time.

Generally speaking it seems to be the feeling of those savings bankers who have gone into the matter that some improvement of corporate indentures is desirable. There has been no complaint generally from our banks and we find that corporate trustees generally have acted with a high sense of their fiduciary responsibilities. Occasionally a situation has arisen, however, which indicates the desirability of some improvement in corporate trust indentures. In these situations the difficulty has arisen not because of the failure of a corporate trustee to act properly but because of the limitations as to his duties contained in the indenture itself.

I know of no other practical way to improve corporate indentures in these respects except through the method of statutory prescription of minimum requirements. The purchasers of securities ordinarily have no opportunity to participate in the drafting of the indenture itself. It is not a satisfactory answer to say in my judgment that

they can examine the indenture and exercise their judgment with respect to purchasing the bonds after the event.

A complete disclosure through the registration method would not in my judgment seem to be sufficient. Such a method does not attack the real problem of finding an effective method to bring about changes in the indenture where such changes seem desirable.

Some of our savings bankers have been giving thought to this subject for some years and have felt that investors should unite and use their collective purchasing power as a bargaining weapon to bring about changes in those instances where necessary in corporate indentures. This has been done through united effort by some of the larger institutional investors in certain isolated cases. As a general rule, however, it does not seem to be practicable for the smaller institutions to do this. To accomplish this result suggestions have even gone so far as to discuss the creation of a central agency to act for the smaller institutional investors in an anlaysis of corporate trust indentures and in an effort to perfect them in the interest of purchasers.

I might say that such a movement has been on foot by cooperative action of the life-insurance conference, a group of smaller life companies in the West, in discussions with the savings banks.

I think our institutions are primarily interested in those provisions of the bill which have to do with the activities of the corporate trustee prior to default, particularly subsection (e), which relates to the furnishing of information, and subsection (g) of section 7. From our standpoint it is more essential that the corporate trustee assume such affirmative duties prior to default as seem necessary or desirable. It is at this stage that the bondholders are usually not on the alert and should be in a position to depend with some assurance upon the action of the corporate trustee to follow matters for them.

I have two suggestions to make on behalf of the savings banks. The first is that these affirmative duties should not be so burdensome as to discourage or prevent responsible institutions from acting as corporate trustees. I assume that the trust company committee of the American Bankers Association have satisfied themselves as to the workability of the provisions.

The second qualification was also mentioned in my statement before the Senate committee but perhaps was not emphasized sufficiently. We do not think that the bill should delegate the right to remake or alter the contract entered into between the parties. According to my understanding it is not the intention to do so, and I think that the language of the bill should be made perfectly plain in that respect. As I understand it, the theory of the bill is to set up in the indentures insofar as it is practicable minimum standards for corporate trustee action. Quite apparently, it is not practicable in a statute to write in the actual language to be incorporated to accomplish these results and necessarily some discretion must vest in the Commission. with respect to the propriety and adequacy of these specific provisions. But the Commission's jurisdiction should end at that point. It should not have power to deal with the substantive features of the contract.

I have particular reference to the language of subsection (m), of section 7. The language in that section has been vastly improved in this draft but it seems to me that some further clarification is

required, particularly insofar as it relates to paragraph 3. Subsection (m), as you will observe, provides that

the indenture to be qualified shall contain provisions which the Commission deems adequate, having due regard to the public interest and the interest of investors, with respect to the following matters. Paragraph 3 contains the rights, powers, and remedies of the indenture security holders and the language in which and the conditions upon which such rights, powers, and remedies may be exercised, including

And so forth.

Now, it seems to me that the term "rights, powers, and remedies" is a very broad term and might be interpreted to relate to any feature of the agreement rather than purely to procedural steps to be followed by the trustee. I should think that the language of subsection (m) should be restricted so as to make it perfectly plain what the Commission intends to do, and I understand that is in conformity with the Commission's thoughts in this matter and my own request is that the language be clarified so that there will be no misunderstanding about it in the future. It might be clarified in a variety of ways. One suggestion is that the language in subsection (m) in lines 16 and 17 on page 40 be amended to read as follows:

For the purpose of effectuating the purposes of this act relating to the qualifications, conduct, and duties of the indenture trustee, the indenture to be qualified shall contain provisions which the Commission deems adequate.

And then go ahead as the act now reads. In other words, for the purpose of effectuating the purposes of this act relating to the qualifications, conduct, rights, and duties of the indenture trustee, the indenture to be qualified should contain provisions.

Mr. BOREN. Mr. Chairman.

Mr. EICHER. Mr. Boren.

Mr. BOREN. Would it be pertinent to call the attention of the representatives of the Commission here to that suggestion and ask specifically that they reply on that suggestion?

Mr. BURKE. I have it, sir.

Mr. OLIVER. I might say, to be frank about it, that the Commission asked me to make suggestions and I did not know that anything was being done until I got a copy of this draft last week.

It might be done also by another method. You might have inserted at the end of line 18 a somewhat similar provision to that which has been inserted in subsection (1) as follows:

having due regard to the public interest and the interest of the investors and not inconsistent with the bargain of the parties.

Mr. EICHER. Bargain of the parties?

Mr. OLIVER. And not inconsistent with the bargain of the parties. The first suggestion I make conforms to the general provisions of that similar character which we have in most of our State banking laws dealing with the general duties of banking boards. There are any variety of ways in which I think the language could be restricted in such a fashion as to make it plain that the Commission is not delegated power to change the contract between the parties

We are not interested in the precise language that is employed. We are only interested in seeing that it is clear.

Mr. BOREN. You do not anticipate any foundation for fear that the Commission would issue such rules and regulations as might interfere with you?