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to be placed at the mercy of a jury on the question of fact, where the judgment of a jury is conclusive as to whether or not the trustee was negligent.

It was my thought that some word should be chosen which would be an affirmative standard, and which would provide that if the trustee does certain things, he shall be exonerated.

Gross negligence is probably too strong a term to use, but there may be some intermediate term, such as “clear negligence”, that could be used.

The CHAIRMAN. I think that so far we have "reasonable care” and "gross negligence." What is there in between? Mr. Brown. You have got a proviso, as I understand it

The CHAIRMAN (interposing). I am speaking now of the different degrees of negligence that are ordinarily used. In some cases only the care that a reasonably prudent person would use is required; in other cases one is required to use extreme care, the care that an extremely prudent person would use. There is that distinction in negligence.

Mr. Brown. I fully concur in Mr. Posner's remarks. If you go beyond the degree of care which a prudent man occupying any fiduciary position should exercise, you get into a new realm of conjecture, which the courts have not yet passed upon. I think there is a difference between negligence, clear negligence, and gross negligence.

The CHAIRMAN. I do not know the distinction between negligence and clear negligence. I do not know what you have in mind there.

Senator TOWNSEND. Mr. Brown says gross and clear.

The CHAIRMAN. Gross and reasonable are the two. We have reasonable care and gross negligence.

Mr. BROWN. I think language could be found to provide an intermediate ground, which would protect the trustees against the vagaries of juries, particularly when there has been a group of bondholders which has suffered a great loss, on the one side, and a large bank or corporation on the other side. Juries are bound to be prejudiced and are bound to look at the action of a trustee in the light of subsequent events and not in the light of events as they existed at a prior time.

The CHAIRMAN. Of course, when we say reasonable care, we always measure it by what a reasonably prudent person would do under like circumstances, and I suppose that one acting in a fiduciary capacity, using that definition, would be subject to a higher degree of care than one who was just sweeping a sidewalk or doing something of that kind.

Mr. BROWN. I grant that.

Senator TOWNSEND. Mr. Brown, you and Mr. Posner are agreed on many of your objections to the bill, are you not?

Mr. Brown. We are agreed on some of them; I do not think we are at all agreed on others.

Senator TOWNSEND. I think that if we could get the amendments which would revise the bill in accordance with your views, they would, at least, help the committee to understand your contentions.

The CHAIRMAN. I think you have enough help. You ought to be able to prepare the amendments to carry out your objections.

Mr. BROWN. All right. I know, however, from experience in drafting legislation, that it is a very difficult and dangerous matter to attempt to amend one section of the bill without throwing a lot of the other sections and provisions of the bill out of kilter.

The CHAIRMAN. The committee will have to assume that responsibility eventually.

Mr. Brown. Thank you, gentlemen.
The CHAIRMAN. Mr. Canright, would you care to be heard?
Mr. CANRIGHT. Yes, Mr. Chairman.

(The following is a letter from Mr. Brown presenting certain amendments in accordance with the committee's suggestion:)


Chicago, June 25, 1937. Hon. ROBERT F. WAGNER, Chairman of the Committee on Banking and Currency,

United States Senate, Washington, D. C. DEAR SENATOR WAGNER: Complying with your request at Tuesday's hearing on the Barkley bill before your committee, I am submitting amendments which, I am definitely convinced, represent the minimum required to protect the securityholders' interest and to safeguard trustees to the end that responsible and experienced trustees may be available and participate in the essential function of corporate financing under conditions that will not place the banking structure of the country in serious jeopardy. I will note in connection with each proposed amendment the reason underlying its suggestion. My references will be to committee print no. 2.

As to the security holders:

1. To meet the requirements of local financing of local industry in other than the biggest cities and to lessen to that extent at least the tendency of the bill to force corporate financing and corporate trusteeships into the biggest financial centers (where local conditions and what is good for the local obligor and the security holders is not as intimately known) and further to protect the security holders by keeping open the obligor's lines of current short-term commercial credit, I urge that the prohibition against loans by a trustee should be eliminated, and that the apportionment penalty provision of subsection (c) be applied to all "penalized” loans, eliminating the question of proof. The potentiality of a detrimental conflict of interest does not justify the prohibition against loans, particularly when in most cases the conflict never materializes. I suggest, therefore, to accomplish this purpose, that subparagraph (6) beginning at line 12 and ending at line 18 of page 24 be stricken. The reference to this section in paragraph (d) on page 31 would thereupon become superfluous so the language at line 10, page 31 "from the operation of paragraph (6) of subsection (b) of this section and” should be deleted. This amendment also involves a deletion of lines 12 to 25 on page 29 and lines 1 to 8 through the word "payment” on page 30. Finally, there should also be eliminated the last four words of line 9, all of lines 10 and 11, and the first seven words of line 12 on page 30.

2. To preserve the time-honored so-called “rescue” loan by a trustee bank to a corporate borrower to carry it over emergencies, which experience clearly demonstrates is for the interest of all concerned, I suggest changes as follows:

Page 29, line 6: Insert after the word "period” the words or to the extent of such claim only, any security for a claim received simultaneously with the creation of such claim whether prior to or after the beginning of such four months' period,”.

Page 29, lines 9 and 10: Strike out the words "prior to such date” and insert the words "and simultaneously released.”

3. After default of a corporate issue, the waiver of the interest or principal payments on the indenture securities by the bondholders, is frequently an absolute essential of any businesslike work-out of the obligor's difficulties. Clearly this should be left to the determination of the security holders in cooperation with the trustee under the circumstances of the particular case and should not be circumscribed by a fixed prohibition in the indenture. This change is solely for the benefit of the security holders and affects the trustee only in that it restricts its field of action for security holder's protection. To this end I suggest that the language of subsection (1) on page 36 beginning with the word "except” on line 12 of page 36 and ending at line 18 should be stricken.

As to the trustee:

Reiterating my testimony of last Tuesday, I fear the potential danger to the banking structure contained in the proposal to impose affirmative active duties on the trustee and denying protection to the trustee except on the narrow test of simple "negligence." The existing test commonly used of "gross negligence” may be too broad but by the same token the proposed test of “negligence” is

clearly too narrow; I suggest, therefore, there be added at the end of subsection (j) on page 38 the following language: "but may contain provisions protecting the trustee from liability for any error of judgment; for any action taken or inaction deliberately suffered (a) at the request of the holders of not less than a majority in principal amount of the indenture securities at the time outstanding or (b) independently of the security holders, in good faith and without negligence; and for any omission in the execution of the trust not the result of bad faith or negligence. Such indenture may also provide that as to claims against the indenture trustee predicated on negligence reasonable doubt in respect thereof shall be resolved in favor of the indenture trustee.”

If this or similar language is added, then subsection (3) on page 36 beginning at line 23 and ending at line 2 on page 37 should be stricken.

Incidentally, the indenture trustees do not now, and probably will not in the future, receive fees commensurate with the assumption of any greater degree of liability than suggested in the above provision.

My final suggestion is that if the Securities and Exchange Commission is to have the contemplated unlimited authority to insist on the inclusion of additional provisions in the trust indenture affecting the rights of the borrower, the lender, and the trustee, then, inasmuch as the Securities and Exchange Commission is by law charged with protecting the interests of security holders and would be remiss in its duties if it did not resolve all doubt in favor of the security holders, it seems to me that some governmental agency charged with the protection of our banking structure should sit around the table when provisions affecting the trustees are to be adopted. Without specifying any particular language, I believe, as I testified on Tuesday, that the rules and regulations of the Securities and Exchange Commission, promulgated under this bill should, so far as they affect the trustees' responsibilities and liabilities, be subject to the approval of the Federal Reserve Board, which is now by law charged with a general control of trust operations of member banks of the Reserve System, which encompasses practically all banks doing a trust business in this country.

In conclusion, I repeat, as I testified on Tuesday, that the subject matter of this bill merits much more complete exploration before it is fixed in our statutory law, and that the suggestions in this letter represent a minimum of amendments to make the bill useful and desirable in a workaday world, if we are to have legislation at this time. Anything less would be risking too great a tearing of our economic, industrial, and financial fabric, and therefore clearly is not in the public interest.

I am sending under separate cover a number of mimeographed copies of this letter, so that they will be available for such distribution to your fellow members of the Committee as you may deem desirable.

Thanking you again for your courtesy in continuing the hearings so that I might testify, and further for the courtesy extended to me by you and your fellow members at the hearing, I am Sincerely yours,



TRUST DIVISION, CONTINENTAL ILLINOIS NATIONAL BANK & TRUST CO. OF CHICAGO, ILL. Mr. CANRIGHT. Mr. Chairman and Senators, our approach to this bill is somewhat different from that of any of the others who have testified here, and our conclusions are different. We do not believe that a trustee has only routine duties or is only a mechanical agency.

The CHAIRMAN. When you say "we," whom do you mean?

Mr. CANRIGHT. I am representing the Continental Illinois National Bank & Trust Co. of Chicago, and I am speaking only for it.

The CHAIRMAN. I see.

Mr. CANRIGHT. We have always regarded or assumed that a trustee was appointed because there should be someone to see that a contract made by a corporation for the protection of its bondholders was carried out. To that extent we agree with the Securities and Exchange Commission that a trustee should be an active trustee, although we might differ to some extent as to what that action should be.

We appreciate the work that the Securities and Exchange Commission has done in this investigation. We think it has been helpful. We think it has even pointed out to trustees some pitfalls that they ought to avoid. But it is evident from the report of the Commission that its study is not based upon a full consideration of the problem of financing industry; it is only a study of a relatively few cases, in which bondholders lost money partly through the failure of trustees to do their duty or to perform their duties properly.

Nevertheless, we believe that the Commission has shown a need for greater supervision over the trusteeships. We feel, however, that all parties will agree that in any remedial legislation consideration of the good to be accomplished must bear some relation to the harm that may

be done. It is from that standpoint that we approach this proposition.

We have given this thing very careful study. We started with a predilection in favor of the idea of the Commission before we had seen their bill. We have given a lot of thought to it. After careful consideration, we are convinced that the whole theory of the bill is wrong

Trust companies and banks exercising trust powers are not fly-by-night concerns; however, some of them may abuse their powers or fail to perform their duties as trustees. They are creations of the state, and they exist at the will of the state. If there are some trust companies which by reason of incompetency or lack of integrity do not perform their duties properly, it would seem to us that the proper remedy is to take away their right to act as trustees.

This brings us to our objections to this particular bill. I am not going to discuss it in detail, as I would if I were proposing amendments to it; I am going to discuss it from the standpoint of the theory of this manner of accomplishing what the Commission feels should be accomplished.

Section 7 of the bill sets up certain standards by which to determine whether a trust company is disqualified to act as trustee. Some of these standards are harmless; some are very serious. There is no attempt to eliminate the incompetent or dishonest trustee but only to eliminate certain artificial situations, which at some time, and under certain conditions, may tend to dissuade the trustee from performing its functions properly. A trustee could be free from all the disqualifications that are mentioned in the bill and still be a very unsatisfactory trustee; and, on the other hand, it could have practically all the disqualifications mentioned in the bill and still be a very excellent trustee. The real qualifications of a trustee are integrity, experience, good business judgment, and a high sense of moral responsibility. If a trust company has these qualifications, it will see that it does not have relationships that are actually conflicting; or if by change of situation or conditions inconsistent releationships should develop, it will take prompt steps to prevent them, whenever that situation arises. The real test of whether a trustee measures up to its responsibilities is how it performs its job, and that cannot be determined by any set of arbitrary standards or by rule of thumb.

Section 7 (b) of the bill provides an indenture trustee shall be deemed to have a conflicting interest if(6) such trustee shall be or become a creditor, directly or indirectly, secured or unsecured, of an obligor, except as authorized pursuant to subsection (d) of this section, if the indenture to be qualified is not secured by the pledge or mortgage of property or if any indenture securities outstanding had a maturity at the time of issuance of less than five years;

As was pointed out this morning, there is nothing inherently inconsistent in a bank's loaning money to a corporation when it is acting as trustee under one of its indentures. For example, a company in good financial condition, well managed, with good earnings, has an issue of debentures outstanding. It comes into the bank with whom it has customarily done business and which is trustee under that indenture, and says, "We should like to borrow $100,000 for our seasonal purposes, for our normal operations.

There is no reason in the world why the bank should not lend money to that company simply because it is trustee under its indenture.

Naturally, the bank is not going to lend money if it does not expect that it is going to be repaid. It is not going to lend money if it thinks the company is going to default under its debenture issue. Nobody wants to lend money and later be dragged into a creditors' action or a bankruptcy court. Banks lend money only when they have reasonable expectation that those to whom they lend are going to continue to do business and not get into financial difficulties.

Senator TOWNSEND. Under the provisions of this bill could the bank lend to the company?

Mr. CANRIGHT. Only as permitted by the provision I have just read. That provides that if you are trustee under a secured indenture-that is, where there is a pledge of property or a mortgage of property—then the bank can lend to the obligor on the indenture securities, if the securities issued under that indenture have a maturity in excess of 5 years; otherwise, it cannot.

There is another exception, but it does not bear upon the point I have in mind.

There may come a time, if the borrower gets into financial difficulties and the bank is still a creditor of the corporation, when there may arise a conflicting interest. If that situation should arise, that is the time when the bank could either sell its note that it had taken from the corporation, or resign as trustee and eliminate that conflict.

Frankly, we are and have been for years trustee under indentures of a great many corporations. Those corporations are customers of the bank. I have no doubt that we lend money to them from time to time, but it has never affected our operations. In the corporate trust division we have never known whether they borrowed money from us or not. Certainly, not knowing whether they borrowed money, our judgment could not have been affected as to what we should do as trustees, and it has not.

We have had two or three cases—not more than three-in which the companies did get into financial difficulties, and the bank was a creditor. There we resigned as trustee, because we felt that there might be some conflict when we came to the enforcement of the obligations. We resigned as trustee, and another trustee was appointed in our place.

Furthermore, a bank likes to be trustee for its own customers. It would rather lend money to a man whom it knew paid his bills and who it knew had a proper regard for his obligations. No bank wants to take over a trusteeship if it feels that it is not going to succeed. A bank does not like to have bondholders lose money by it. Its good name is at stake. But when you have a customer who has been

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