After the word "date", page 29, line 10, insert: “or received contemporaneously with the creation of such claim".

Strike on page 29, line 12, beginning “if the indenture” to and including “of five years or more" on line 15.

After the word "thereof," page 29, line 17, insert: “held in such special account,”. Strike from beginning of page 29, line 23, to line 8 on page 30 ending with the words "to such payment.' On page 30, line 9, strike the word "further." On page 30, line 9, strike beginning with the words "if such indenture" through the words "years or more," on line 12.

Strike, page 31, lines 10 and 11, "from the operation of paragraph (6) of subsection (b) of this section and".

The CHAIRMAN. Our next speaker will be Mr. Brown, president of the First National Bank of Chicago.

STATEMENT OF EDWARD E. BROWN, PRESIDENT, FIRST NATIONAL BANK, CHICAGO, ILL.

Mr. BROWN. My name is Edward E. Brown. I am president of the First National Bank of Chicago. I have been connected with the bank for over 27 years, originally entering the law department of the bank, becoming after 2 or 3 years its general counsel, then general counsel and vice president, senior vice president, and, since 1934, president.

The CHAIRMAN. You are a member of the Federal Advisory Council? Mr. BROWN. Yes, sir.

The CHAIRMAN. That is the council that submitted this report? Mr. BROWN. Yes, sir.

The CHAIRMAN. To the committee and to the newspapers?

Mr. BROWN. I did not give it to the newspapers, Judge; I do not know who did.

Senator BARKLEY. Was that report prepared before certain amendments were suggested to this bill, which are written in here?

Mr. BROWN. The detailed report was accompanied by a letter sent by the Council, and a telegram sent by Mr. Loeb and myself, who were two of the three members of the subcommittee, Mr. A. A. Tilney being the third member. We stated that in our opinion—and Mr. Tilney disassociated himself from it-the revised committee draft of the bill was still objectionable from the standpoint of the safety of the banking structure of the country.

The CHAIRMAN. Mr. Tilney did not enter into this report, did he? Mr. BROWN. Mr. Tilney signed this report before the second committee bill was submitted.

The CHAIRMAN. I see. Because we heard his testimony at the last hearing.

Mr. BROWN. But he did not join in the telegram stating that the second redraft by the committee was still objectionable.

The CHAIRMAN. Very well, Mr. Brown; we shall be glad to hear you.

Mr. BROWN. Until 1933 I was also an officer of the First Trust & Savings Bank, an affiliated trust company doing a large corporate business, which was merged with the First National Bank of Chicago in 1933. My duties and experience in the bank caused me to be active in connection with the problems arising out of the bank acting as corporate trustee under trust indentures where the issue defaulted and also with protecting the investments of the bank secured by corporate trust indentures, of which we were continuously large

holders through the period. I am a member of the Chicago Clearing House Committee. I have been chairman of it; and for many years prior to my being a member, I was counsel for it and, as such, came in contact with banks in financial difficulties and was able to observe the effect on their solvency and ability to continue, of liabilities existing in their trust departments.

I want to make it clear that I am here as president of the First National Bank of Chicago to express its views, and not of the Advisory Council. I thank you for continuing this hearing in order to give me an opportunity to do this.

I have read the testimony before this committee on last Tuesday and regret that we cannot agree with those who spoke for the American Bankers Association and the larger trust companies in New York. In fairness, I should state that two of our officers who were privileged from time to time to join in the internal discussions of the American Bankers Association committee agreed that this committee should confer with the Securities and Exchange Commission with a view to working within the structure of the proposed bill; that is, that the regulation is to be done through the Securities and Exchange Commission. It was, however, clearly understood that any bank was to be free to express its individual opinion regardless of the outcome of the committee's negotiations with the Securities and Exchange Commission. Although our original hope was that the whole question might be explored more fully before the enactment of any legislation and that possibly, inasmuch as most corporate trusteeships are held by banking institutions, reform in existing trustee machinery might well be approached on the basis of an improvement in practice under the jurisdiction of the Federal Reserve Board and the Comptroller of the Currency, nevertheless I shall confine my remarks to the structure of the present bill providing that the regulation is to be done through the Securities and Exchange Commission.

Coming to the bill itself, its primary purpose is to protect the investor, particularly the small investor who has not the ability or the means available to the large investor to protect himself. With this object, no one can quarrel. The chief means by which this is proposed to be done under the bill are, first, by requiring that a corporate trustee be appointed under every indenture and that such trustee have responsibility commensurate with the responsibility to be placed upon it under the trust undertaken; second, by disqualifying the corporate trustee if he has certain enumerated conflicts of interests; third, by requiring the corporate trustee to share with indenture holders collections or security received from the obligor under certain conditions; and fourth, by requirements that the corporate trustee shall assume various active duties not now generally assumed, and prohibiting various exemptions from liability now practically universally found in corporate trust deeds.

As to the first-that a responsible corporate trustee shall be named in every indenture-I assume from the bill and the Commission's report, and the tenor of the testimony before the committee, that the Commission feels that the only institutions, generally speaking, with sufficient capital resources and experience properly to undertake the responsibilities of being corporate trustee are banks of deposit, whether called banks or trust companies, and that it is the expectation that most corporate trustees under indentures conforming to the bill

will be banks of deposit. With this I have no quarrel except to point out that the primary duty of a bank of deposit is to its depositors and that it is not good public policy to allow or encourage a bank of deposit to accept contingent liabilities which might possibly exhaust its entire capital resources and put its depositors in jeopardy. The failure of one or two larger banks or a number of smaller banks, through liabilities imposed upon them as a result of trust operations, might easily produce another national banking crisis. It seems to me obvious that the entire capital of a bank should not be put at the risk of its trust operations as against its liability to depositors, both commercial and savings.

As to the second means-the disqualification of the trustee because of conflicts, actual or potential-I have no quarrel with the general theory that a trustee having a conflict should be disqualified.

Senator BARKLEY. At that point, let me ask you this: Is it your view that where a bank voluntarily assumes the responsibility of a trustee, its duty to its depositors is greater than its duty to the investors in the indenture for which it is acting as trustee?

Mr. BROWN. Well, if it assumes that liability, it assumes it, with exoneration clauses or with certain limits upon its liability, Senator Barkley. I think that with banks such as ours, that are acting as corporate trustees under indentures of 10 or 15 times their capital resources-and the same situation exists in New York: Frequently they are indenture trustees for securities in excess of their total deposits-it is not fair that the depositors, by reason of the single failure of a hundred-million-dollar mortgage or some such great liability, should have their money put in jeopardy

Senator BARKLEY. If the bank of deposit, which of course has an obligation to its depositors, voluntarily-and it can only be done voluntarily assumes the obligation of trustee under bonds, and so forth, where the holders of the bonds or indentures have no relationship whatsoever with the bank, have no opportunity to know what the trustee is doing, commensurate with the knowledge or opportunity for knowledge that a depositor may have with respect to his bank, where is the priority of obligation there, if there is any, as between the investors in the bonds for which the trustee is acting and the depositors? And if there is a conflict of interest there, where should there be any priority of interest? And what should that bank be permitted to do just continue that double relationship and devote its attention chiefly to the one which it prefers, and let the rest go?

Mr. BROWN. The answer to that is that the only corporate trustees today with sufficient capital and experience are banks of deposit. The only institutions with sufficient knowledge, particularly in industrial business and industrial trusteeships, and the problems of business, are banks of deposit which, through their lending operations, have become acquainted with the problems of the particular businesses. And this bill says that a bank shall not accept a trusteeship unless it accepts certain duties, and is prevented from certain exonerations. Senator BARKLEY. Yes.

Mr. BROWN. I merely say that a bank of deposit, for the good of the whole banking structure of the country, should not be allowed to put its entire capital funds in jeopardy. In many States part of the capital of a bank is segregated to savings depositors, as against commercial depositors.

Senator BARKLEY. Of course, banks of deposit may become creditors of the obligors, at the same time acting as trustees. There ought to be some way in which the eggs can be unscrambled there, so as to differentiate between the bank's duty to its depositors-which, of course, links up with its duty as a creditor of the obligor-and its substantially impartial duty as a trustee among all of them. How are you going to do that unless you draw some limitations as to what it may or may not do?

Mr. BROWN. Well, I come to the question of conflicts, Senator, if you will wait for that discussion.

Senator BARKLEY. Very well.

Mr. BROWN. I have not given any intensive study to the way in which the bill treats the question of conflicts, because I do not think it is the primary problem created by the bill. The Commission and the A. B. A. committee have greatly improved the conflict portion of the bill as originally drafted. My general impression is that the conflict provisions of the bill are geared in the light of very large security financing of large corporations and that they may prove unduly restrictive in the case of smaller corporations locally financed and not meet the requirements of smaller communities.

You get a city like Grand Rapids, or even like Louisville: It may very well happen that considerable business requires the total banking lines of the community; and to prohibit borrowing like that is merely to force the trusteeship to some other center, such as New York, Chicago, or Philadelphia.

The CHAIRMAN. Mr. Brown, several of us have to be on the floor of the Senate at 12 o'clock. But I think all but Senator Barkley will be able to be back here at 2:30. Will it be all right if we continue our meeting at 2:30 this afternoon, and consequently stop at this point? Senator HUGHES. I think that will be satisfactory.

Mr. BROWN. Yes; Mr. Chairman.

The CHAIRMAN. Then, if that is satisfactory, we shall continue our hearing at 2:30.

(Whereupon, at 11:50 a. m., a recess was taken until 2:30 p. m. of the same day.)

AFTER RECESS

The hearing was resumed at 2:30 o'clock p. m., at the expiration of the recess.

The CHAIRMAN. You may proceed, Mr. Brown.

STATEMENT OF EDWARD E. BROWN, PRESIDENT, THE FIRST NATIONAL BANK, CHICAGO, ILL.-Resumed

Mr. BROWN. As to the third provision, that the corporate trustee shall share with indenture holders collections on its own obligations, or security obtained therefor under certain conditions, I fully approve the theory that the trustee should not better his position as against holders of indenture securities. One of the provisions of the bill is, I think, highly detrimental to the interests of investors and business generally, and I believe your committee should carefully consider it and hear evidence thereon. It frequently happens that shortly before or after a default a concern has to meet payrolls, rentals, taxes, or other current expenses which, if not met, will mean bankruptcy or a

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77-B proceeding; and in the case of an industrial concern far more than in the case of railroads or other public utilities, bankruptcy generally means grave loss to all types of creditors, whether security holders, banks, or trade. It has been quite general practice in the past for the trustee in its individual capacity as a bank under such circumstances to make a secured loan to avoid immediate disaster. Frequently no one but the bank which happens to be the trustee will make such a loan. Under the bill as drafted the making of such a loan would not only disqualify the trustee unless the indenture indebtedness was secured, but the trustee could not realize upon its security without sharing it with the indenture security holders.

My purpose today is to address my remarks primarily to the fourth means proposed for protecting the investor, namely, the mandatory imposition of active duties on the trustee, both before and after default, with the prohibition of exoneration clauses such as are now universally found in corporate trust deeds. I assume that the committee clearly realizes that the bill prohibits the freedom of a borrower to contract with prospective investors regarding the duties and obligations which the trustee is to assume, and gives overriding rights to the Commission to write the provisions of the contract if one is to be made. I am not here today to discuss the question as to whether such a policy is in the interest of the investor or of the public. But I do want to point out that in the bill as drafted the imposition of such active duties on the trustee, both before and after default, imposes very grave liabilities on the trustee, and such liabilities, coupled with the prohibition of adequate exoneration clauses, may cause corporate trustees to suffer losses which, if they are banks of deposit, may threaten their solvency, and with them the integrity of our banking structure, and also cause many bankruptcies that would otherwise be

avoided.

If it be said that a bank of deposit need not accept such a corporate trusteeship if it deems the terms of the indenture too onerous, the answer is that many banks, even reluctantly, will do so under the pressure of competition. And if no bank of deposit does accept it, there is no considerable number of nonbanking trust companies with sufficient capital, experience, and reputation to meet the intended responsibilities under this bill.

I propose to make a general presentation of this subject, although, if the committee desires, I am prepared to point out, section by section, provisions which bear on this subject.

At the risk of going over ground familiar to your committee, I wish to point out briefly the difference in trust mechanics and theory now existing in the personal and corporate trust fields. In the case of personal trusts, a trust company is charged with the management of property of various kinds and is paid a real fee for performing such duties and accepting the responsibility which goes with their performance.

It rarely happens that in the case of a single personal trust the entire corpus of the trust is more than a fraction of the trust company's capital and surplus. The corpus of a large trust is generally distributed through many classes of securities and property, so that the liability for improvident or negligent conduct is a risk which, if ordinary prudence is exercised, does not threaten the bank's capital structure or its depositors. The high scale of fees paid for servicing personal trust business compensates for whatever risks are assumed.