REGULATION OF SALE OF SECURITIES TUESDAY, JUNE 29, 1937 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The subcommittee met, pursuant to adjournment on Tuesday, June 22, 1937, in the Banking and Currency Committee room, Senate Office Building, at 11:30 a. m., Senator Robert F. Wagner (chairman) presiding. Present: Senators Wagner (chairman), Bulkley, and Townsend. Present also: Senators Barkley, Adams, Hitchcock, and Lodge. The CHAIRMAN. The committee will come to order. Mr. Buttenwieser, we will be delighted to hear from you. STATEMENT OF BENJAMIN J. BUTTENWIESER, CHAIRMAN, INVESTMENT BANKERS ASSOCIATION OF AMERICA SPECIAL COMMITTEE ON TRUST INDENTURES; NEW YORK, N. Y. The CHAIRMAN. Tell us your full name and address, and also your banking associations. Mr. BUTTENWIESER. Benjamin J. Buttenwieser; residence, 17 East Seventy-third Street, New York. I am a member of the firm of Kuhn, Loeb & Co., 52 William Street, New York, but I come here as chairman of the Investment Bankers Association of America special committee on trust indentures. The references in this memorandum, by the way, are to committee print no. 2, which was the only one available to me yesterday. The Investment Bankers Association of America, through its special committee on trust indentures, desires to record its regret that through the absence of the committee's chairman in California on a business trip and the closing of public hearings on this bill at an earlier date than the special committee had anticipated, it was unable to express to the Senate committee at its public hearings the views of the association with regard to this bill. It therefore takes this means of now conveying these views to the committee. As it is aware that various other organizations have presented to the committee their opinions of the bill from their own particular viewpoint, this memorandum of the Investment Bankers Association special committee will confine itself to consideration of the bill only from the standpoint of investment bankers and the investing public and corporate borrowers, the interests of all of whom the members of this association are solicitous of safeguarding, and not from the standpoint of any other parties affected by the bill. 185 The CHAIRMAN. May I interrupt you there long enough to ask you to tell us something about this association? Mr. BUTTENWIESER. The Investment Bankers' Association of America is composed of practically all firms, corporations, and organizations carrying on the so-called investment-banking business, that is, the business of selling securities to the public through public offerings. Its membership, I should assume, is somewhere around four or five thousand firms throughout the country. It represents all sections of the country. and all categories of investment banking, that is, as differentiated from commercial banking, which is represented by the American Bankers' Association. That, I think, broadly enunciates the difference between investment banking and commercial banking, and the two associations which represent each of those categories. Does that explain it sufficiently? The CHAIRMAN. Yes. Mr. BUTTENWIESER. At the outset the association wishes to emphasize that, for the continued improvement of financing methods and standards and for the protection of investors, it heartily favors any legislation which will better serve and safeguard the important interests which the investment-banking business serves. Consequently it feels that certain provisions of the bill represent decidedly constructive and sound legislation. However, the association equally feels that in certain other respects the bill is unsound, in that, through the very generality of some of its provisions, it delegates to the Securities and Exchange Commission powers far beyond what the association believes Congress would knowingly delegate to any administrative body of the Government and far in excess of the responsibilities which any such body should feel warranted in assuming. Specifically we refer to section 7 (m) (1) and (3), page 40, lines 7 to 15 and 18 to 19, wherein it is stated that [reading]: The indenture to be qualified shall contain such provisions as the Commission shall deem necessary or appropriate in the public interest or for the protection of investors in respect of * * * restrictions or conditions on the release and substitution of any property subject to the lien of the indenture (and) on the issuance of additional indenture securities * * * (and) the definition of what shall constitute a default thereunder. Senator ADAMS. May I ask you there, is it your understanding of this section of the bill-I may say, as a member of the committee, that I have not seen the bill before this moment-that the law as proposed would give to the Securities and Exchange Commission the right to fix the conditions in a deed of trust or an indenture controlling the manner in which property covered by the original instrument should be released, or under which substitutions could be made, and also could fix the definitions of what should constitute a default? Mr. BUTTENWIESER. Yes; and particularly the issuance of additional indenture securities, in other words, the issuance of additional securities under that same indenture, or, in fact, the terms of the indenture when it is initially set up, as we read that section of the bill. Senator ADAMS. How does it reach that by requiring the submission of the indenture to the Commission before it is executed, or by seeking to reserve the power to modify it after its execution? Mr. BUTTENWIESER. Submitting it for qualification under the act, and, during that 20-day period, examining its terms, and, if they do not meet with the approval of the Commission, as we read the bill, refusing to qualify it, at the time when that indenture would otherwise be qualified. Senator ADAMS. Can the Commission, under the bill, prohibit effectively the issuance of an instrument of encumbrance unless it meets their requirements? Mr. BUTTENWIESER. As we read the bill, Senator, yes. We further quote section 8 (a), page 42, lines 20-24 and page 43, lines 6 and 7, wherein it is stated that [reading]: * * * The Commission shall have authority from time to time to make, issue, amend, and rescind such rules and regulations and such orders as it may deem necessary or appropriate in the public interest or for the protection of investors and to prescribe or recommend forms of indentures or of any provisions required or permitted to be included therein. These parts of the bill, together with various similar though not so obvious portions of it, actually empower the Securities and Exchange Commission to dictate the terms, convenants and provisions of any indenture to be registered with it. It would seem extremely doubtful that Congress, one the one hand, intends to grant any such broad, unrestricted powers to any governmental agency, or, on the other hand, that the Securities and Exchange Commission would want to shoulder the broad responsibility of having investors assume, as indeed they would have a right to infer from such provisions of this bill, that the Commission, by so passing on an indenture, had approved its terms, such approval, in effect, being tantamount to formulating the terms of the security to be offered to the investing public. We feel that such assumption would become widespread among investors and would lull them into a false sense of security. Moreover, we feel that, if the Securities and Exchange Commission is to be cloaked with such powers, it is disingenuous for the bill to contain, as it does in section 13, page 49, lines 11 to 16, a statement that [reading]: * * * It shall be unlawful for any person in issuing or selling any security to represent or imply in any manner whatsoever that the Commission has in any way passed upon the merits of or given approval to any trustee, indenture or security. Senator ADAMS. Do you mind an interruption there? Senator ADAMS. I am wondering why, in your statement, you say that the submitting of these instruments to the Securities and Exchange Commission, with the assumption that the Commission had approved them, if they were registered, would lull the people into a false sense of security. I was wondering if the fact that the Commission had approved it would not give a sense of security that would not be false. Mr. BUTTENWIESER. That is my very point, Senator. The public would be led to believe that the Commission had passed on the terms of the security, and, therefore, they would infer from that that they probably passed on its very merits. Senator BARKLEY. That is not true now of the exercise of the authority of the Securities and Exchange Commission over the issue. of securities. The public does not get any idea that the Commission has approved the merits of the issue. They are required to file certain information with the Commission so that the public may obtain that information and make up its own mind, but there is no guaranty, moral or otherwise, attached to it. Mr. BUTTENWIESER. That is quite right, Senator Barkley. Senator BARKLEY. This provision requires the indenture to set out certain details, certain facts, certain conditions, which, when set out, entitle it to qualify for registry. That does not carry with it any moral obligation on the part of the Government that it is guaranteeing it, or that it has passed upon the wisdom or the merits of the issue. Mr. BUTTENWIESER. Senator, that is just the differentiation we seek to make in this memorandum. There is a basic difference in concept, as we see it, between the Securities Act of 1933, as amended, and the bill at present under consideration. If you would like to have me explain it at this time, I can. If not, the explanation will follow in this memorandum. Senator BARKLEY. Go ahead with your statement. Mr. BUTTENWIESER. It seems to us that the conclusion is inescapable that, if the investing public, as it inevitably would, became aware of the broad powers which the Securities and Exchange Commission would have under such sections of this bill as cited above, investors would be warranted in feeling that they had bought a security which was issued under an indenture that had been passed by a national board of quasi-security censors. It is our considered opinion, based on comprehensive experience and knowledge of countless examples in point, that the formulation of the terms and provisions of a security and the indenture by which it is to be secured are and should be the subject of arm's length discussion and negotiation between the obligor and the investment banker through whom the securities are to be offered to the investing public. The problems of one corporate borrower differ from those of another and every case necessarily differs in matters of substance from the next. Investment bankers who are faithful to the trust reposed in them by the investing public assume the responsibility of designing and obtaining an equitable balance of terms and safeguards which, on the one hand, will best protect and serve the interests of the investing public and, on the other hand, will not be so onerous to the obligor as to render its corporate functioning difficult or impossible. We could cite many instances where provisions of indentures, formulated in an excess of zeal or caution to safeguard the investing public, so shackled the obligor that they proved a boomerang to the investing public in that they seriously undermined the ability of the obligor to obtain credit through normal channels when it was most needed. It is this type of indenture which, under the guise of strengthening the obligation it secures, may very often eventually weaken it. It is along this line that we feel the preamble to the bill is ill-considered when it recites in section 1 (a) and 1 (a) (5), page 2, lines 1 to 6, and page 5, lines 22 to 25 [reading}: * * * It is hereby declared that the national public interest and the interest of investors * * * are adversely affected when, by reason of their lack of understanding of the situation and the fact that such securities are publicly offered, such investors are unable to procure the insertion of adequate protective provisions in trust indentures * * The very practicalities of the situation demonstrate that this is not the fact. The investment bankers who purchase an issue of securities from an obligor are the initial investors in such an issue. If for none other than a selfish purpose, they are naturally zealous in their endeavors to have each indenture under which such securities are issued render the greatest possible protection to such securities, so that their resale to the investing public will be more readily facilitated. A statement such as that cited above can only be based on a mistaken view of the realities of the investment situation. In this regard we believe that the substitution of a governmental agency for an original purchaser, such as the investment banker, in the negotiation of the substantive terms and provisions of a trust indenture, would represent retrogression rather than progress. It is our sincere belief that the interests of investors are better served when a governmental agency, such as the Securities and Exchange Commission, has determined that the provisions which have been agreed upon between the initial investor-most usually the issuing banker and the obligor, and their effect in actual practice, are clearly described to the ultimate investor-most usually the investing public-so that the latter is well aware of the type of security which is being purchased and the terms of the indenture under which such a security is being issued. In this connection we feel that a rule similar to that contained in the proposed rules of fair practice of the Investment Bankers Conference, Inc., would adequately meet the situation. This rule reads as follows: If any issue of securities has a title which is misleading as to the lien, terms or priority of such issue, a member shall state in the prospectus, if any, or, if there is no prospectus, shall disclose in some other manner to each purchaser of such securities the facts with regard thereto. Senator BARKLEY. Why do you limit that misleading statement to the title, whereas frequently, over an almost unreadable number of pages, facts are not set out? Mr. BUTTENWIESER. We have amplified that. In the next sentence we recommend going a step further. We would recommend going one step further and providing, as is the intent of the rule we have quoted, that the lien, terms, priority, and other important provisions of an issue must be clearly disclosed through the prospectus to each purchaser of such a security. Our other main observation is that we believe this bill renders each indenture which is to be qualified under it the subject of specific approval by the Commission, rather than having it qualified by meeting general rules embodied in the legislation in question. In support of this view we cite the following additional excerpts from the bill: From section 6 (5) page 16, lines 23 to 25, and page 17, lines 16 to 24 [reading]: * * * * * * * The Commission shall issue an order refusing to permit an application to become effective if it finds that * * the indenture or any security to be issued thereunder contains any provision * the elimination of which is necessary or appropriate in the public interest or for the protection of investors and from section 7 (g) and 7 (g) (4), page 33, lines 24 and 25, and page 34, line 6, and page 35, lines 5 to 7 [reading]: The indenture to be qualified shall contain provisions in respect of * * * the performance by the obligor of such of its other obligations under the indenture as the Commission deems necessary * We believe that broad, generalized language of this nature is fraught with danger in that the administration of such an act, which must necessarily devolve upon a rather large body of governmental administrators, is susceptible of maladministration and arbitrary rulings. This belief on our part is based on the fact that the bill would vest too 151514-37--13 |