authority having jurisdiction to examine or supervise such trustee, no report made by any such trustee or prospective trustee to any such authority, and no correspondence between any such authority and any such trustee or prospective trustee, shall be made available to the public by the Commission.

(c) Nothing in this Act shall be construed as empowering the Commission to conduct an investigation for the purpose of determing whether the provisions of an indenture as to which an application for qualification is effective are being complied with, or to enforce such provisions.

Any investigation of a prospective trustee under subsection (a) of this section or under any of the provisions of this Act shall be limited to determining whether such prospective trustee is qualified to act as trustee under the provisions of section 7 of this Act.

AND SUITS

SEC. 11. (a) Orders of the Commission under this Act shall be subject to review in the same manner, upon the same conditions and to the same extent, as provided in section 9 of the Securities Act of 1933.

(b) Jurisdiction of offenses and violations under and jurisdiction and venue of suits and actions brought to enforce any liability created by, this Act or any rules or regulations or orders prescribed under the authority thereof shall be as provided in section 22 (a) of the Securities Act of 1933.

LIABILITY FOR MISLEADING STATEMENTS

SEC. 12. (a) Any person who shall make or cause to be made any statement in any application, report or document filed with the Commission pursuant to any provisions of this Act, or any rule, regulation or order thereunder, which statement was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, or who shall omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, shall be liable to any person (not knowing that such statement was false or misleading or of such omission) who, in reliance upon such statement or omission, shall have purchased or sold a security issued under the indenture to which such application report or document relates, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading or of such omission. A person seeking to enforce such liability may sue at law or in equity in any court of competent jurisdiction. In any such suit the court may, in its discretion, require an undertaking for the payment of the costs of such suit and assess reasonable costs, including reasonable attorneys' fees against either party litigant. No action shall be maintained to enforce any liability created under this section unless brought within one year after the discovery of the facts constituting the cause of action and within three years after such cause of action accrued.

(b) The rights and remedies provided by this Act shall be in addition to any and all other rights and remedies that may exist under the Securities Act of 1933, or the Securities Exchange Act of 1934, or the Public Utility Holding Company Act of 1935, or otherwise at law or in equity; but no person permitted to maintain a suit for damages under the provisions of this Act shall recover, through satisfaction of judgment in one or more actions, a total amount in excess of his actual damages on account of the act complained of.

UNLAWFUL REPRESENTATIONS

SEC. 13. It shall be unlawful for any person in issuing or selling any security to represent or imply in any manner whatsoever that any action or failure to act by the Commission in the administration of this Act means that the Commission has in any way passed upon the merits of, or given approval to, any trustee, indenture or security, or any transaction or transactions therein, or that any such action or failure to act with regard to any statement or report filed with or examined by the Commission pursuant to this Act or any rule, regulation, or order thereunder, has the effect of a finding by the Commission that such statement or report is true and accurate on its face or that it is not false or misleading.

PENALTIES

SEC. 14. Any person who wilfully violates any provision of this Act or any rule, regulation, or order thereunder, or any person who wilfully, in any application, report or document filed or required to be filed under the provisions of this Act or any rule, regulation, or order thereunder, makes any untrue statement

of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, shall upon conviction be fined not more than $5,000 or imprisoned not more than five years, or both.

EFFECT ON EXISTING LAW

SEC. 15. Nothing in this Act shall affect (1) the jurisdiction of the Commission under the Securities Act of 1933, or the Securities Exchange Act of 1934, or the Public Utility Holding Company Act of 1935, over any person, security, or contract, or (2) the rights, obligations, duties or liabilities of any person under such Acts; nor shall anything in this Act affect the jurisdiction of any other commission, board, agency, or officer of the United States or of any State or political subdivision of any State, over any person or security, in so far as such jurisdiction does not conflict with any provision of this Act or any rule, regulation, or order thereunder.

CONTRARY STIPULATIONS VOID

SEC. 16. Any condition, stipulation, or provision binding any person to waive compliance with any provision of this Act or with any rule, regulation, or order thereunder shall be void.

SEPARABILITY OF PROVISIONS

SEC. 17. If any provision of this Act or the application of such provision to any person or circumstance shall be held invalid, the remainder of the Act and the application of such provision to persons or circumstances other than those as to which it is held invalid shall not be affected thereby.

Amend the title so as to read: "A bill to provide for the regulation of the sale of certain securities in interstate and foreign commerce, and through the mails and the regulation of the trust indentures under which the same are issued, and for other purposes."

THE WHITE HOUSE, Washington, May 24, 1937.

Hon. ROBERT F. WAGNER,

Chairman, Banking and Currency Committee,
United States Senate,

Washington, D. C.

MY DEAR SENATOR WAGNER: I scarcely need recount to your committee the very great progress in the protection of investors which the Congress accomplished through enactment of the Securities Act of 1933. Since that date extensive investigations and reports by the Securities and Exchange Commission have demonstrated that further strengthening of that act is necessary in connection with the form and content of trust indentures and the duties to be assumed by trustees acting under them. The Commission has now concluded its investigations, and I believe the consideration of such supplementary legislation altogether appropriate at this time.

It seems to me to be beyond debate that trustees under indentures should be held to a duty of active, vigilant representation of bondholders; that they should be free of all conflicting interests; and that indentures should not be so drawn as to permit them to evade their rightful responsibilities.

I understand that there is before you for your consideration a bill introduced by Senator Barkley, S. 2344, which seeks to attain these ends. Certainly they are the essential objectives of the legislative program needed to meet existing deficiencies in the law and in corporate trust practice.

Very sincerely yours,

I think Commissioner Douglas is here.

FRANKLIN D. ROOSEVELT.

Do you want to make a brief statement first, Senator Barkley? Senator BARKLEY. Yes; if you please.

STATEMENT OF HON. ALBEN W. BARKLEY, A SENATOR OF THE UNITED STATES FROM THE STATE OF KENTUCKY

Senator BARKLEY. Mr. Chairman, before Mr. Douglas, a member of the Securities and Exchange Commission, makes his statement, I wish to make a very brief statement.

In the Securities and Exchange Act of 1934 it is provided by section 211 that the Commission is authorized and directed to make a study and investigation of the work, activities, personnel, and functions of protective and reorganization committees in connection with reorganization, readjustment, rehabilitation, liquidation, or consolidation of persons and properties, and to report the result of its studies and investigations and its recommendations to the Congress on or before January 3, 1936.

Pursuant to that authority and that instruction the Securities and Exchange Commission made an exhaustive investigation of all the matters referred to in that section, and made its report to Congress on June 18, 1936. The report consists of a document containing 227 pages. The investigation covered several months. During that investigation, as is shown by this report, some very startling conditions were revealed in the matter of reorganizations, trusteeships, trust indentures, and the issuance of all sorts of indentures, bonds, and securities by corporations, and with reference to the appointment and activity or nonactivity of trustees who had been appointed but who presumably did not look after the welfare of investors in these indentures, bonds, and securities that were issued.

As a result of this investigation and the report to Congress, this bill has been drawn to correct these glaring injustices, inequalities, and failures of trustees, issuers, guarantors, and obligors to protect adequately the interests of investors who had been induced, for one reason or another, to invest their money in the indentures issued by these organizations.

The bill which has been introduced is technical; it is complicated, as the subject of course must be, and it requires a great deal of intensive study to visualize the evils which it seeks to correct.

I am not going into that matter. Mr. Douglas, a member of the Commission, is here, and he will go into it in detail. He conducted the investigation, and he and his assistants have been primarily responsible for the drawing of this bill.

You will find from the confidential committee print, which is before you, that after the bill was introduced the American Bankers Association, through its representatives, some of whom are here, Mr. Hanes and Mr. Page, representing that association, which of course is interested in legislation of this sort by reason of the fact that it affects their members, many of whom are trustees of organizations and reorganizations and are supposed to look after the details of these debentures and other issues that are put out to the public, got together and have agreed on some amendments which are set out in this confidential print in italics in order that the committee might more readily understand them. A good many are technical and many are substantial, but they do not change the fundamental theory of the bill, which will be explained as we go along through the bill, by Mr. Douglas and his assistants.

I do not wish to take any more time of the subcommittee, and I will reserve my remarks for the floor of the Senate when the bill comes

up for consideration. Mr. Douglas is here, and I am sure the committee will find him completely conversant with this whole subject, with the background, the history of the investigation and the need for it and for the legislation. Mr. Page and Mr. Hanes are here from the American Bankers' Association, and other gentlemen are here who will be heard if they desire or if the committee finds it necessary.

I think the bill has been worked out through cooperation with the Commission and the bankers' association, and I do not think that there will be any serious opposition to this bill. There may be some provision that might be changed here and there, but substantially the bill meets the approval of the whole financial world, as I understand it, and those who will be expected to come under it and be governed by it.

The CHAIRMAN. The subcommittee will be very glad to hear from you, Mr. Commissioner.

STATEMENT OF WILLIAM O. DOUGLAS, MEMBER OF THE SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D. C., ACCOMPANIED BY EDMUND BURKE, JR., MEMBER OF THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D. C.

Commissioner DOUGLAS. Mr. Chairman, if you desire it I might take a few minutes to sketch, in brief terms, the general background of the corporate trustee problem, to acquaint the committee with the point of view and the general philosophy expressed in the Barkley bill.

you should.

The CHAIRMAN. Yes; I think Commissioner DOUGLAS. If at any time I get too far away from specific detail I wish you would remind me; and thereafter I can go through, in such detail as the committee desires, the committee print of the Barkley bill, indicating what the major provisions are.

As a general background, in our judgment the problem presented by the Barkley bill is that of providing greater protection and safeguards for investors under trust indentures. It has been conservatively estimated that 40 billions of dollars of securities nationally distributed have been issued and are outstanding under trust indentures.

The inadequacies of law and of corporate practice which exist in connection with these instruments have created national problems which require present solution. To these the Barkley bill is addressed. To these problems the Securities and Exchange Commission in the past 2 years has given intensive examination and thought, and, last summer, submitted to Congress a report on the subject.

The current interest in the matter is evidenced also by the studies undertaken during the same period by special committees of the American Bankers Association and of the Investment Bankers Association, and by the earnest endeavor of the leaders among the corporate trustees to raise the standards for their profession.

The Commission, I would like to say, has received from these groups many constructive suggestions and ideas in the course of its study of these problems.

EVOLUTION OF TRUST INDENTURE

The trust indenture is the product of a hundred years' evolution in the methods of financing commercial and industrial development by the widespread sale and public distribution of corporate securities. It is undeniably a convenient adjunct in the sale of issues of bonds, debentures, and notes wherever assets are to be pledged or mortgaged to secure such issues. The practice of giving security for a loan is, of course, as old as the history of private enterprise itself; as investment needs and markets grew, the sale of secured bond issues merely gave a broader scope to a very old institution.

Senator BARKLEY. Mr. Chairman, if I may interrupt just a moment: There is no objection to giving members of the press copies of this confidential print, is there?

The CHAIRMAN. I think not.

Senator BARKLEY. It has not been agreed to, but it is a matter of public information.

The CHAIRMAN. It is really your final submission?

Senator BARKLEY. Yes; but of course it is subject to any change that the committee may want to make. If the public is interested, I think you might as well let them have it.

Commissioner DOUGLAS. At a relatively early date in the development of the trust indenture device, the idea became fixed that it was preferable, for both legal and practical reasons, to make the pledge or mortgage of assets run to a single title holder, a trustee, instead of directly to the constantly shifting and changing body of persons who were the owners of the securities. Instead of having many mortgagees, there was therefore only one-the trustee-so that in the event of a default the borrower would not be subjected to the harassment and expense of many foreclosure actions arising out of the one default. Then, too, by placing in the trustee the principal right, and duty, to bring foreclosure actions when these became necessary, the convenience of the bondholders was also served, and a great deal of duplication of effort and expense avoided in regard to the enforcement of their security.

As an incident to this, if claims had to be filed by the bondholders to protect their interests in a judicial proceeding, the trustee was a convenient agent to perform this necessary function. In this way there were gradual accretions upon the powers of the trustees.

The trust indenture is the instrument embodying the obligations of the issuer; the powers, duties, and responsibilities of the trustee; and the powers and rights, as well as the disabilities, of the owners of the securities.

The vesting of important powers in the trustees was inevitable in the nature of the trust indenture device. The security holders themselves are generally widely scattered and their individual interest in any one issue is likely to be small. For example, I might say parenthetically that in our study of real-estate issues, all of which were uniformly secured by these indentures, the average holding by investors was about $2,000. They do not have the initiative, the knowledge, the time, or the funds necessary for the constant and continued safeguarding of their investments.

The trustee, on the other hand, soon came to be, and is generally today, a single large bank well equipped by training and competence for its responsibilities under these indentures. And it is to a great