Page images

of course, in the regulatory agency. I would rather think, however, and again that is my own personal view, without having considered the matter—that inasmuch as the Securities and Exchange Commission deals with the very securities that are being issued, and the two matters are somewhat related, it might be advantageous for the Securities and Exchange Commission to likewise supervise the preparation of the indentures.

The CHAIRMAN. Of course, they also conducted the investigation, did they not, which brought out many of the abuses attempted to be corrected?

Mr. OLIVER. That is correct.
The CHAIRMAN. Thank you very much, Mr. Oliver.



Mr. PAGE. Mr. Samuel Untermyer in his testimony on June 15 made certain recommendations for amendments to the bill having to do particularly with bondholders' lists, notice of defaults, undertaking for costs, and reliance upon certificates and opinions. .

While, in my opinion, Mr. Untermyer's testimony contained a number of inaccuracies, I shall not take the time of this committee to answer any except those which relate to his proposed amendments. As to those, I believe the record should be cleared.

On the subject of bondholders' lists, section 7, paragraph (f), page 33 of the committee print of the bill, Mr. Untermyer in his testimony, beginning at the foot of page 156 of the minutes of this hearing stated:

Now then, the obligor cannot do it; he has no such information; it is the trustee who has the information; he is the one who pays the coupons.

This is incorrect. In practically all indentures it is provided that principal and interest are payable "at the office or agency of the company.”. It is true that in many cases the trustee institution acts also as paying agent, although this is far from always the case, and the appointment is revocable. The information belongs to the obligor and not the trustee. Consequently, the bill, as submitted, is correct in placing the obligation upon the obligor for maintaining the record and supplying it to the trustee. The bill on page 33, line 12, specifically makes available to the trustee all such information in the possession of the paying agent or obligor.

Mr. Untermyer in his proposed amendment beginning at the foot of page 158 and carrying over to page 159 of the minutes of the hearing proposes that the trustee or paying agent be charged with the duty of ascertaining from the persons or institutions presenting such coupons for payment or to whom such interest payments are made the names and residences of owners of such bonds.

This is an impracticable suggestion, would not only seriously slow up the payment of interest but would involve the imposition of a second ownership-certificate system upon the present ownershipcertificate system required under the Federal Revenue Act. This for the reason that the Federal Revenue Act ownership certificates, because of certain exemptions granted by the act and regulations thereunder, do not always disclose the names of the actual owners,

[ocr errors]

and particularly in the case of corporate owners require only a statement of the fact of corporate ownership. The imposition of a second ownership-certificate system would involve a serious additional burden on business. In his proposed amendment Mr. Untermyer proposes that the lists shall be available to any bondholder, at any time, upon the payment of reasonable cost of preparing the list. Paragraph (f) of section 7 of the bill as presented requires the trustee to make the same or the use thereof available to indenture security holders subject only to such terms and conditions as the Commission deems not detrimental to the public interest or the interests of investors.

In other words, the bill now requires the trustee to make the list or the use thereof available to any bondholder subject only to such conditions as the Commission may impose in the public interest or the interest of investors. I need not tell you gentlemen that a mandatory provision that such lists be at all times available to any bondholder is not in the public interest nor in the interest of bondholders themselves. You gentlemen are familiar with the laws of a number of States putting restrictions upon the availability of stockholders' lists, and in the case of New York also upon lists of bondholders. I feel strongly that this question may be safely left in the hands of the Commission.

Mr. Untermyer's next proposal is that section 7, paragraph (i), on page 37 of the committee print of the bill be amended to eliminate the right of the indenture trustee "conclusively to reply as to the truth of the statements contained therein" upon certificates and opinions submitted to it under the conditions imposed by that paragraph. Mr. Untermyer states that this is improper because such certificates are usually furnished “by the reorganization committee or the company itself.” This statement is not only inaccurate but wholly at variance with the provisions of the bill. Senator Barkley called Mr. Untermyer's attention to the parenthetical phrase now contained in paragraph (i) to the effect that the provisions on this subject contained in an indenture shall be subject to such requirements as to independence and qualifications and the exercise by the trustee of reasonable care in its selection, as the Commission may deem necessary or appropriate in the public interest or for the protection of investors, and if the Commission deems that such provisions do not materially conflict with the required standards of care, it would seem that this is a conclusive answer to Mr. Untermyer's suggestion.

His next proposed amendment deals with section 7, paragraph (k), appearing on page 38 of the committee print of the bill. He desires the bill amended so that there shall be a mandatory requirement upon the mortgage trustee to give prompt notice of every default. Such a provision would make the duty of the trustee simpler and perhaps less dangerous but in many instances certainly would not be in the interest of the bondholders themselves.

It is not necessary to point out to you gentlemen that public notice of default is certain to be harmful to the credit of the company and probably to the market price of the securities of the company. Defaults vary greatly in importance. On one extreme there may be an honest oversight-perhaps in some large company an insurance premium or certain local taxes may not be paid. Is it wise under these circumstances for the trustee to publish immediately a notice, rather than to take reasonable time and reasonable care to determine whether or not the default may be cured without danger to the bondholders? A sinking-fund default is often of real importance. On the other hand, I can conceive of circumstances where the trustee may have substantial evidence that the default is only temporary and that it may be much in the interest of the bondholders to give the company reasonable time to work out of its difficulty rather than to destroy what chances the company has by public notice of default with consequent injury to its credit.

His last proposal for amendment deals with section 7, paragraph (1) on page 39 of the committee print of the bill. Here he objects to the discretion given to the court to require an undertaking for costs and to assess reasonable costs against any party litigant having due regard for the merits and good faith of the suit or defense.

You gentlemen all know of the so-called strike suits which Mr. Untermyer himself mentions in his testimony. Unfortunately, they are all too frequent. All this section does is to empower the court in its discretion to require an undertaking for costs when it believes that a suit is without sufficient merit and to assess the costs after the litigation where it is satisfied that one party or the other to the litigation acted without good faith and without a meritorious cause. The language of this paragraph is modeled on a similar provision in section 8 of the Securities and Exchange Act.

In general, it appears to me that each one of Mr. Untermyer's proposed amendments would tend to make easier the path of the strike suit. The bill, as proposed, puts no real handicap on any meritorious action of any bona-fide bondholder.

The CHAIRMAN. Thank you, Mr. Page.

Mr. McCOLLOM. Mr. Chairman, my name is H. C. McCollom. I am an attorney at law, in New York City. My address is no. 1 Wall Street. I should very much like to obtain the permission of the committee to add a statement to the record, if it seems desirable upon further consideration.

The CHAIRMAN. I am very sure the committee will be glad to have your views, because I know your practice involves a great many of these very questions that are raised.

Mr. McCollom. Yes; I have had about 30 years' experience with these questions.

The CHAIRMAN. We would be very glad to have your statement. I will ask you to get it in very soon.

(The statement referred to is as follows:)



At the hearing on June 22, 1937, I was granted permission to file a memorandum, which I am now submitting, as an interested citizen and attorney. In so doing. I am not acting under any retainer or for compensation. The views set forth in this memorandum, although perhaps held by many others, are expressed by and for the writer only.

I am an attorney at law, with my office at no. 1 Wall Street, New York City. I was admitted to the bar of the State of New York in 1905. I have also been admitted to the bar of the United States Supreme Court and of various other Federal courts. For nearly 30 years much the greater part of my time has been spent in advice to and representation of trustees under corporate indentures, both before and after default. To a lesser extent I have represented also issuing corporations, bondholders, and other security holders.

I have made a careful study of the Barkley bill in the form in which it was introduced and in its form of June 10, 1937, and of the report (hereinafter termed “report”) of the Securities and Exchange Commission (hereinafter termed “Commission”) dated June 18, 1936, entitled “Trustees Under Indentures”, this being the report from which the Barkley bill originated.


In order not to encumber this memorandum with details which may or may not interest the subcommittee (hereinafter termed "committee”), I annex hereto a copy of my article which appeared in the Columbia Law Review of December 1936 under the title "The Securities and Exchange Commission and Corporate Trustees.” This article discusses the above-mentioned report of the Commission. There are certain parts of this report, particularly those which may be read as suggesting general maladministration by corporate trustees, which are not urged by anyone; and in this respect the article is not presently in point.

However, it is annexed for two reasons:

First, because it states accurately the extensive duties now commonly performed by corporate trustees; and the committee may wish to study the existing situation in order to determine the extent to which legislative changes are desirable;

Second, because the recommendations contained in the report are substantially embodied in the Barkley bill, and therefore the comments made in the article upon these recommendations are entirely pertinent.

The appended article does not discuss the portion of the report which deals with conflicts of interest. However, the most important alleged conflict of interest is discussed herein.


There is no basis whatever for any argument that present administration of corporate trusts, in any substantial percen jage of cases, is incompetent, selfseeking, or dishonest. The quality of administration naturally varies with the experience and competency of the trustees; but inasmuch as the vast majority in amount of these trusts are administered by banking institutions of long experience, good character, and full competency, the general standard of administration is very high. Responsible trustees are jealous of their reputations. They are anxious to avoid any basis for proper criticism. During recent years, and before as well as after the criticisms contained in the above-mentioned report, they have assumed increasingly active functions. The extensive duties which they presently perform, before and after default, are stated quite fully in the annexed article. There are not a large number of banking institutions which have the experience, personnel and resources to serve as competent and responsible corporate trustees. Therefore, legislation which would tend to force fully qualified trustees out of the administration of these intricate trusts and transfer such administration to inexperienced or irresponsible trustees would be a major catastrophe. The harm which would thus be done would be out of all proportion to any defects which presently exist.

Nevertheless, most informed and fair-minded persons would admit that there are defects in the present system. The most important of these are, in my opinion, the following:

There have been some instances wherein, immediately preceding default under an indenture, banks have obtained the repayment of a larger part of their unsecured loans than unsecured debenture holders have realized. This practice is improper, and now is commonly so regarded. Undoubtedly the practice existed to a substantial extent in the past; but it should be realized that there was a fairly general acquiescence therein by other creditors because of the view that bank loans, although not legally entitled to preference, should be preferred in order to continue credit for the new company.

The provisions of many indentures have been weak in that they did not adequately safeguard the interest of the security holders in respect, for example, of substitution of collateral or release of property.

The trustees have been under no obligation to keep the security holders informed as to matters substantially affecting the trust estate, such as substitution of collateral, release of important property, or major defaults in payments to the trustee (for example, for sinking fund, or for interest in cases where the trustee acted also as paying agent). No machinery has existed for the supplying to the trustee of a list of the names and addresses, so far as known, of security holders and for the supplying by the trustee to the security holders, in proper cases, of


such lists. On the other hand, there have existed no such provisions as are properly contained in section 7, subsection (1) of the Barkley bill, permitting the court in its discretion to assess costs and attorneys' fess against a losing party in strike suits.

The trustees have been relieved in practically all cases from liability for ordinary negligence as distinguished from gross negligence. This was entirely proper when trustees were not paid for assuming the risks of ordinary negligence; but there is much to be said in favor of the view that trustees should assume and should be paid for assuming, the risks of ordinary negligence, but only if proved beyond a reasonable doubt.

These existing defects can be eliminated in a practical way by the bill if changed as hereinafter suggested.


1. It would prevent loans for less than 1 year by a bank to a corporation for whose

debenture issue the bank was acting as trustee This provision, in my opinion, is one of the most harmful, and one of the least justified, of the important provisions in the bill.

The provision is contained in section 7, subsection (b), paragraph (6) of the bill (p. 24, lines 12–18) the exception which would prevent disqualification in certain cases being found in section 7, subsection (d), paragraph (1), (p. 31, lines 9–17).

The principal effect of this provision is, of course, apparent. If the bank was acting as trustee for the corporation's debentures when the loan was applied for, it would have to refuse the loan or resign as trustee. If it had an outstanding loan when requested to act as trustee, it would have to refuse so to act.

Debentures outstanding under corporate indentures aggregate many millions of dollars, and the trusteeships thereunder are extremely important. Many corporations require seasonal loans but do not wish to borrow for a year. Conditions are often such that banks would be justified in making short-term loans but not loans for a year. The great disruptions in financing which this provision of the bill would cause are plain.

The most serious effects would probably occur when conditions were not good. The source to which the corporation would have to look in such times would be its usual bank. A bank having no prior relations with the corporation could not be expected to extend credit under such conditions. If the corporation had debentures outstanding, the same bank would usually be the trustee. Under the provisions of the bill, the bank, in order to make the loan, would have to resign and the trusteeship would be transferred to some other bank which, if not less qualified and less responsible, would at least be entirely unfamiliar with the affairs of the corporation. If the bank should keep the trusteeship, the corporation would have great difficulty in obtaining the loan. Wholesale resignations or wholesale failures or both might well be the result of this provision of the bill. The making of the loan in bad times might be of great benefit to the debenture holders themselves.

Assume, on the other hand, good times. What possible reason can there be in such times for preventing a bank from making short-term loans to a corporation for whose debentures it is acting as trustee? This is a normal and beneficial relationship.

The great fault in this provision of the bill is that it supposes a conflict long in advance of actualities, and is purely theoretical. There is no reasonable justification whatever for the provision, provided that the bank is prevented, as should be the case, from gaining an advantage over the debenture holders. The fundamental error is that a conflict is presumed to exist as of a date when there is in fact no conflict, whereas the bill should be limited in application to a date when the possibilities of conflict are real. The bill presently contains provisions designed to prevent the betterment of the position of the lending bank as against the debenture holders. These provisions are contained in section 7, subsection (c), (p. 27, line 22, to p. 31, line 8), although this language would require some revision.

Also it is not apparent why the trustee's rights in funds collected by the bank should be entitled to priority over the bank loan, as is presently provided in section 7, subsection (c), paragraph (2) (p. 30, lines 3–8). If, as is unquestionably true, there is no vice merely in the fact that the same bank is both the lender and the trustee, obviously there is no reason why the bank should be penalized by deferment of its loan any more than there is a reason why the bank should obtain prior payment of its loan.

« PreviousContinue »