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No effective provision is made to assure proper performance of its duties by a trustee, nor to assure that you are going to have the proper kind of trustee.

All that is intended to be accomplished by the bill can be accomplished, and much more effectively, without any disturbance or hindrance of normal business activities and with much less burden on banks and trust companies, and at very much less cost to all concerned by a very simple procedure, which I will suggest.

Both the Governors of the Federal Reserve System and the Comptroller of the Currency have at the present time very broad powers of examination and have the right to demand from banks under their jurisdiction reports of their activities. If it should be determined that it is necessary to give them any broader powers than they have at the present time, or if it should be feared that they would not exercise their existing powers to the extent they should, a very simple amendment to the sections relating to either the powers of the Governors of the Federal Reserve System or relating to the powers of the Comptroller of the Currency could be made, which would accomplish the purpose.

For convenience of reference, I will assume that it would be the duty of the Comptroller to determine whether the bank was performing its duties as trustee properly.

With reference to conflicts, the omptroller could require a bank which is both trustee and creditor or stockholder of the obligor to report immediately-he could require it to report all the time, though I think it is unnecessary—if there was any indication that there would be a default under the indenture or that the loan of the bank might not be paid at its maturity, with a statement of what action the bank proposes to take or has taken to eliminate the conflicting interest.

In that connection, I would say that if a bank had an existing loan and a corporation increased its collateral, the Comptroller might very well provide by regulation, or you could have a provision in the law, which ever was thought desirable, that that should be prima-facie evidence that it was known that the company was getting into financial difficulties.

Senator SMATHERS. What about an individual named and acting as a trustee?

Mr. CANRIGHT. Well, you won't have an individual trustee applying to any of the cases such as the Commission has here involved. You are talking about securities that are sold in interstate commerce; you are not talking about the little $10,000 issues or even $50,000 issues. You are talking about the issues that are of national importance. The Commission itself has the right to exempt issues up to $250,000. I do not think you are going to have individual trustees.

Senator SMATHERS. I understood that some of the greatest complaint here was against individual trustees, in land deals, for instance, in one State or another.

Mr. CANRIGHT. Well, I would say this: If you have got a case of the individual trustee, do not try to deal with it under the same indenture or under the same legislation by which you are attempting to regulate corporations or trust companies which are representing large industrial users of money. That is an entirely separate and distinct situation.

The CHAIRMAN. You may have an individual trustee here, may you not-a cotrustee?

Mr. CANRIGHT. A cotrustee; yes. He is just there so that he can take title to the property and act when the corporate trustee could not.

Returning to what I was saying. On receipt of such report, the Comptroller could not only make it the duty of the trustee to change its dual capacity, but he could see that the conflict was actually eliminated.

With reference to defaults, the Comptroller could require reports from the trustee as to the fact of such default and what action it had taken in the matter. The Comptroller could, in view of all of the known circumstances, pass intelligent judgment upon whether the trustee was performing its functions properly, instead of attempting to decide that 10 or 15 years in advance. Then he knows what the situation is. He is not predicting 15 or 20 years ahead what he should do, but he knows what the circumstances are, and the Comptroller, after conferring with the trustee, is in a position to determine whether the trustee is doing his job properly or not.

With respect to the action of the trustee prior to default, the Comptroller could require reports from the trustee as to what action it was taking with reference to such matters as he deemed of sufficient importance to justify the inquiry and again the Comptroller could be given information as to all of the circumstances and in the light of existing conditions could determine whether the action of the trustee was reasonable and proper. The Comptroller with his power of examination could readily determine whether any trustee was falsifying or withholding facts.

Thus, at very much less cost and with much less trouble to all interested parties and without unnecessary interference in the normal activities of the people of the country and with no undue burden on commerce and industry, the Comptroller acting on known facts, actually existing, could see that the trustee was affording to bondholders the protection to which they are reasonably entitled. The advantage of this proposed change is, first, that it leaves it in the hands of men who are not looking at one aspect of our credit situation, but who can see the thing as a whole. You are not setting up artificial standards, because it is the best you can do, bụt the Comptroller would be dealing with circumstances as they arise. You are not trying to say a thing will be a conflicting interest, when it might not be a conflicting interest, and it might not cover some things which are conflicting interests. You are not going to have a rigid rule there. It enables the Comptroller to determine those things from time to time as they come up, and there is no reason why the Comptroller cannot get all the information that is necessary for him to keep track of it. And so with each of these other things

Senator HUGHES (interposing). Can the Commission do that?

Mr. CANRIGHT. As I said, it is important to have somebody who is dealing with our entire credit situation, and who sees the picture as a whole, rather than just one thing. The possibility of security holders losing money out to be considered in its relation to the whole credit structure.

There is one thing that would probably have to be added to the bill. I think there should be a provision that if the Comptroller should find that any institution, by reason of lack of ability, experience, integrity, or for any other reason, cannot or will not perform its duties properly as trustee, it should be the duty of the Comptroller to report the same to the Governors of the Federal Reserve System. He will know whether the banks are doing their job. He can report it to the Governors of the Federal Reserve System and, after a hearing, if they should decide that the Comptroller is correct, the right of the institution to act as trustee should be terminated. I think that gives you all the control over trustees that you need. It coalesces all your work relating to credits. It causes no undue burden on banks. It is not going to hamper normal relationships, and it will enable a first-class job to be done, instead of having artificial standards as to what constitutes a real trustee, and will provide a method by which you can have real trustees.

Therefore we submit that the recommendation of this committee should be that the bill be not passed.

The CHAIRMAN. Thank you very much, Mr. Canright.
Mr. Loeb.


NATIONAL BANK & TRUST CO., PHILADELPHIA, PA. The CHAIRMAN. Mr. Loeb, you are the chairman of the Tradesmen's National Bank & Trust Co. of Philadelphia?

Mr. LOEB. Yes, sir.

The CHAIRMAN. Is it in that official capacity that you are appearing here?

Mr. LOEB. Yes, sir.

Mr. Chairman, I have just a short statement to make. As I am in thorough accord with the formal statements made to you by Mr. Brown and Mr. Canright, I feel that you will agree with me that a substantial repetition will only needlessly encumber your records and that no useful purpose will be served. I do not possess their eloquence and experience to present views on this bill, and I am glad that they preceded me.

I do, however, wish to stress my belief that some of the provisions of this act are a menace to the stability and solvency of those banking institutions accepting trusteeships and therefore a menace to the banking system as a whole.

I am in accord with the purposes of this act insofar as it affords protection to security holders, but I question whether that protection is very real in the final analysis if capital funds of trustee institutions are subjected to some of the liabilities implicit in this act.

Generally speaking, liabilities will be determined by juries. Actions for surcharge always increase in adverse times and because of business depression and fall in security prices the urge to recoup losses in every conceivable manner is at a maximum. Juries at such time are apt to be more influenced by public sentiment than by evidence. Large damages usually result and even if after protracted litigation they are reduced, in the meantime the reputation and standing of the bank may have been adversely impaired. The mere starting of an action involving a large sum of money may cause apprehension among depositors, particularly in smaller communities that quite conceivably may affect the ability of a bank to serve the requirements of its depositors, resulting in restrictions to business and employment. Before commenting on the provisions of the act relating to duties of the trustee prior to default and the duties of the trustee in case of default, I should like to refer to some other features of the act, taking them up in the order of their appearance.

Page 11 (c), limiting exemptions to issues not in excess of $250,000 may work a hardship on smaller communities. Issues in such an amount or somewhat larger would not, because of obligations involved and costs of administration tolerable to an obligor company, be apt to interest a distant bank in a larger financial center to act as trustee. Then again, the capital funds of a local bank may not, in the judgment of the Commission, qualify it to act as trustee. Should, therefore, the development in such a community be denied merited capital? The impression is created in reading the act that in an attempt to surround large issues with safeguards, smaller issues are to some extent embarrassed by provisions that practically eliminate them.

Senator HUGHES. May I interrupt?
Mr. LOEB. Yes, indeed.

Senator Hughes. I have not been present at all the hearings. I did not understand that that necessarily eliminated those under $250,000.

Mr. LOEB. It does not necessarily, but the Commission has the right to exempt from the provisions of the act issues up to $250,000.

Senator HUGHES. That exempts them, and the trustee is appointed without any provisions of the law applying to it.

Mr. LOEB. That is for $250,000 and less. In local communities you frequently find a set-up that requires capital somewhat in excess of $250,000, in which the enterprise seeking capital is well known locally, and the securities are purchased locally to a great extent. It is part of the activities of the community, and sometimes the sole activity, and the whole employment and prosperity of the community is dependent upon it.

My next reference is to page 16, line 13. May I ask you to consider the addition of the following words after the word "indenture": or the obligations of the trustee under any such indenture.' It occurred to me that this was implied, but I think there should be a clear statement. The wording of that particular section of the bill is inconclusive to me, and it seems to me that if that is intended it should be included.

My next reference is to section 7 (a) (2), pages 18 and 19. I am wondering if the Commission has in mind any general formula for setting the minimum combined capital and surplus base for trustee qualification. Here again, unless flexibility is provided to compensate for the downward valuation of assets in times of great stress, so that removal or resignation of trustees in such times may be reduced to a minimum, a very real danger to the banking situation exists.

I am generally in accord with the provisions of the act regarding conflict of interest, but caution against the use of rigidity not in the interest of security holders. From such experience as I have had, either acting as a trustee or as a holder of indenture securities, I am firmly convinced that so-called “rescue loans”, made in good faith, have for the most part resulted in improving the position of the security holder and in reestablishing values. Such "rescue loans” should not be permitted to improve the position of the trustee as security holder over other security holders. I suggest that a very careful study be made of this entire subject.

Page 33—duties of trustee prior to default: The obligations imposed upon a trustee prior to default contain, contrary to present practice, provisions for positive action entailing vast responsibility. Reliance may be placed upon certificates and opinions under (i), page 37; yet this reliance, in turn, is qualified by subjecting it to such terms and conditions as the Commission may

deem necessary.

There is not included in this section a provision-see (3), page 36-protecting the trustee from any error of judgment or from any loss arising out of any act or omission in the execution of the trust so long as it acts in good faith and without negligence.” The liabilities are of a continuing nature. Again, from the angle of the stability of the banking system, it would seem quite impossible for any authorized examining body to determine the active or contingent liability of a trustee bound by the undertakings involved in this section. In the current examination of trust departments of banks a careful review is made by the examiners of personal trusts in order to measure potential losses. This has added considerably to the costs of examination. Consideration should be given to just what is involved in an attempt to determine the liabilities arising out of the failure to conform to the provisions of this section.

My next reference is to page 35—duties of the trustee in case of default. While the provisions of this section are more in line with present practice, duties are imposed upon a trustee that might well result in defeating the best interests of the security holders and the obligor company, with its consequential effects upon industry and employment. The comments regarding examination by examining bodies made heretofore are equally applicable to liabilities incurred in the case of default.

The CHAIRMAN. Thank you very much, Mr. Loeb.
Mr. Oliver.



The CHAIRMAN. Mr. Oliver, you are general counsel for the National Association of Mutual Savings Banks, of New York City?

Mr. OLIVER. That is correct. My name is Fred N. Oliver, and I am general counsel for the National Association of Mutual Savings Banks, at 60 East Forty-second Street, New York City. This is a central agency maintained by the mutual savings banks of the United States to act in those cases where unified action seems desirable. Its duties have particular reference to those default situations where the mutual savings banks have had substantial interests in the last few years.

I am appearing especially for a special committee of mutual savings bankers formed in connection with this Trust Indenture Act. This special committee is composed of: Mr. Charles A. Miller, president Savings Banks Trust Co., New York City; Mr. Henry Bruere, president, Bowery Savings Bank, New York City; Mr. Carl M. Spencer, president, Home Savings Bank, Boston, Mass.; Mr. E. K. Woodworth, president, New Hampshire Savings Bank, Concord, N. H., Mr. Austin McLanahan, president, Savings Bank of Baltimore, Baltimore, Md.

Senator TOWNSEND. The gentlemen you have named are united in this report you are about to make?

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