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. În 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.

STATEMENT OF FRED N. OLIVER, GENERAL COUNSEL, NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS, 60 EAST FORTYSECOND STREET, NEW YORK CITY

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?

Mr. OLIVER. Yes, sir. Due to the importance of this measure, a special committee was formed sometime last fall. Its duties were primarily to follow the recommendations, analyze the suggestions of the Securities and Exchange Commission, and be as helpful as possible in connection with this legislation, insofar as it affects our interests. For the information of the committee, the mutual savings banks are mutual in character, as their name implies. Their assets are owned entirely by the depositors, and the profits are paid the depositors in the way of dividends or interest. They are fiduciary institutions operated by trustees who usually serve without compensation. While they are located in 18 States, they are primarily along the eastern seaboard, in the New England States, New York, New Jersey, Delaware, Pennsylvania, and Maryland. Their combined assets aggregate in excess of $11,000,000,000, and their deposits normally range from 20 to 25 percent of the total bank deposits of the country. They have a total of 14,000,000 deposit accounts, with an average deposit of around $700, and their depositors are primarily the small

savers.

These mutual institutions are regulated by law as to the type of their investments and also as to the standards. They are not only restricted as to the type, but also the standards within the type.

Investments in most of the States are confined by statute to mortgages, rails, public utilities, municipals, and governments. In the case of mortgages I think it is almost universally true that they are confined to whole mortgages, so we are not interested in the situation that principally brought about this bill, with reference to real-estate participation certificates, and so forth. A few of the States permit investments in industrials of the better grade.

So that this bill, insofar as the mutual savings banks are concerned, applies only to public-utility bonds, and to a limited extent to industrial bonds of the better grade. I might say that while it applies only to a limited extent to industrials at the present time, it is quite possible that mutual banks may find it necessary to invest to a greater degree in industrials in the future. Experience in the depression has convinced them of the desirability of revising their investment tests as to rails and municipals particularly, which will restrict that field more than it has been restricted in the past, and they will have to find an outlet, perhaps, in the industrial field for their investments. So, in that event, the bill would be important from our standpoint.

Our committee agrees with the general principles of the bill, believing that legislation of this general character is not only desirable but is necessary. Consequently I have been instructed to appear and support, in general, the proposals embodied in this bill, with certain qualifications.

We commend the Securities and Exchange Commission and Professor Douglas and associates for the studies which they have made, believing that they represent an earnest effort to better corporate trustee routine and practices.

Generally speaking, the experience of mutual banks has been restricted to those securities which have had a greater degree of safety and stability, and consequently our experience in the situations criticized in the report of the Securities and Exchange Commission has been limited. Our experience generally has been that the corporate

trustees in those larger and safer issues have performed their functions in a most creditable manner and we have found only a few instances where there have been exceptions.

I may say that the desirability of some general supervision over corporate indentures is demonstrated by the fact that there have been discussions among certain of the institutional investors during the past year or two, with regard to setting up a bureau for the purpose of examining corporate indentures before they became effective, and in the preparation stage.

We have had instances where securities were purchased prior to the examination of the corporate indenture, and subsequently an examination was made and the purchasers sold the securities because they disagreed with some of the terms of the indenture.

I have intended to make no comments on the sections of the bill dealing with the persons eligible as corporate trustees, and the disqualifications of trustees. However, as I understand the bill, it would not interfere with the present trend of investment practice by institutional investors. I refer by that to the growing trend of group purchases of securities by institutional investors, and to some extent by the savings banks. In instances where savings banks might find it desirable to purchase a substantial part of the issue, it might be helpful if they should have the privilege of nominating a cotrustee to represent them in the event of default, under the provisions of the mortgage. This method would hold the banks a little closer together and enable them to act more effectively.

As I read the bill, however, there is no restriction against the appointment of a cotrustee to act in this capacity. While I had not intended to comment on the eligibility of cotrustees, I cannot help referring to the testimony of the gentleman representing the Continental Bank.

My concept of the situation is quite different, I believe, from his. I do not think the primary test should be whether it interferes with the normal functions of some other department of the trustee. As I understand it, the indenture is devised to protect the investors. The primary test should be whether or not the particular relationships of the particular trustee are such as to prevent an investor receiving adequate protection. The fact that it may interfere with his normal business otherwise, it seems to me, should be subordinate to the primary purpose of the indenture. Our group, however, feels very strongly that the measure should not go so far in its terms as to prevent a responsible trustee from acting.

The provisions of the bill in which we have the greatest interest are those sections which impose active duties upon the corporate trustee, and we are more interested in those duties prior to default than those which are imposed subsequent to default.

Prior to default, the bondholders usually are not organized and are not on the alert, and they are not in a position to obtain sufficient detailed information in order that they may be fully advised as to what is happening. It is during this stage, it seems to us, that the corporate trustee should intervene to afford to the bondholders a reasonable amount of protection.

Our committee believes that the affirmative duties should be imposed to the extent that it is practicable, but not so far as to make the performance of the duties so burdensome as to prevent a responsible trustee from acting.

We have gone over the provisions of the bill imposing affirmative duties upon corporate trustees prior to default. It seems to us that those specific provisions are all desirable. We have, however, a particular interest in two of the provisions. One is the provision which requires that the obligor furnish periodically information to the corporate trustee, and that the corporate trustee provide some medium for transmitting that information to the interested bondholders. I have in mind one or two instances demonstrating the need for such information. These instances which I shall mention are isolated cases that have arisen, rather than general cases. Only recently, within the last 2 or 3 months, when a bankruptcy case arose, we found that a small tramway, a small electric line which was a subsidiary of a larger company, had been abandoned about 10 years ago. The entire property had been scrapped and sold, and nobody knew anything about it until the road went into default. It was not the fault of the trustee, because the trustee was living up to his duties under the corporate indenture, but if there has been periodical information furnished that situation would not have arisen. As it is now, it is too late to determine whether or not the sale price of the material was adequate. It is too late to determine whether or not the abandonment was proper.

The second feature in which we are particularly interested is contained in section 7, subsection (g), paragraph (3), requiring more careful investigation and scrutiny of transactions relating to the release or substitution of property. In the same instance to which I have referred, the corporate indenture provided that the corporate trustee might release the property merely upon a resolution of the board of directors of the obligor, and it also provided that the obligor had the right to substitute for the physical property released bonds of the same issue. Under the provisions of this indenture the physical property was sold, and there were substituted bonds of the same issue. When the bankruptcy occurred, we found this subsidiary company with no physical property at all, having as protection for the bonds outstanding only bonds of the same issue supported only by the guaranty of the parent company, which was bankrupt.

So, it seems to me that the question of supervision of the substitution of property in these corporate indentures is particularly important from the standpoint of savings banks, and that reliance should not be had entirely upon some certificate of the obligor itself.

We think also that paragraph (4), with reference to active duties, which requires that the corporate trustee shall see to it that the obligor performs such other obligations under the indenture as are deemed necessary, is desirable. I have in mind there an instance of this kind, Senator Wagner. A great many of our corporate defaults have occurred because the corporations, after the issuance of bonds, continued to expand their debt structure by issuing other bonds for additions and betterments, and increasing the debt until it became top-heavy. As a preventive in the future, I think the trend is to require that the issuing company, the corporation, refrain from capitalizing a certain proportion of its additions and betterments, so as to prevent this tendency toward increased debt. Someone will have to supervise that. I do not know of any other agency to do that, other than the corporate trustee.

With respect to the duties imposed on corporate trustees subsequent to default, we are not interested in these active duties as much