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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 encumbrancé 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. BUTTEN WIESER. 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
great powers of an undefined nature in the hands of such administrators, rather than by the use of specific language and precise terms enunciate principles within the framework of which such an act is to be administered. In other words, we think an act of this nature should provide for the qualification of indentures along prescribed adjective lines rather than having each indenture the subject of individual substantive rulings. We point this out not merely in the interest of the members of the Investment Bankers Association but in the broader interest of borrowers under indentures who would have no way of knowing, prior to the time the indenture is qualified, what the form or provisions of the indenture would have to be in order to elicit the approval of the Commission, and thus would be forced to grope in ignorance while formulating their individual indentures and their financial plans in connection with securities to be issued thereunder. We hope it will be understood that by this observation no criticism, direct or implied, is intended of the Securities and Exchange Commission or its individual members. If the administration of this act could be concentrated in the hands of the five Commissioners, perhaps some of the doubts expressed herein would be resolved and fears allayed.
It is patent, however, that such direct administration cannot be expected of Commissioners already overburdened with the responsibility of administering three novel and comprehensive laws. Consequently, the duty of passing judgment on the literally thousands of indentures which would be presented to the Commission for qualification and, thereby, on the terms of the securities to be offered to the public thereunder, would devolve upon a veritable legion of subordinates whom it would be necessary to add to the staff of the Commission and most of whom could not have that breadth of knowledge and experience requisite for the satisfactory performance of so important a role, especially when, as we have indicated, the patterns or precedents to follow in the formulation of such judgments are so indistinct if not, in fact, entirely nonexistent.
In the interest of brevity we have endeavored in this memorandum to point out only what we considered the most basic faults and shortcomings of the bill. We reiterate that there are parts of it with which our sense of duty to the clientele which we serve dictates our complete agreement; but there are other parts which, while not referred to in this memorandum, that same sense of duty to that clientele and our experience in finance indicate are unsoundly formulated.
Summarizing, we should say that we feel it is sound public policy to entrust to the Commission authority to make certain that the protection which the prospectus represents as being ensured to the indenture security by the indenture under which it is issued is actually so afforded. We do not, however, feel that Congress should delegate, or that a Governmental commission should assume, the responsibility of passing on the substantive provisions of any indenture. Though this responsibility may not be apparent from a cursory reading of the bill, a careful analysis of it clearly demonstrates that this is the power with which it vests the Securities and Exchange Commission. İt appears to us that through this process the Securities Act of 1933, as amended, is being transformed from an administrative law, whose fundamental concept is provision for adequate disclosure, to an approval law whose underlying principle involves specific approval of individual indentures of all types of corporations, large and small, and, through that approval, of securities issued by such corporations under such indentures. Such a transition we firmly believe must inevitably lead to lulling the investing public into a false sense of security, and this, of course, is something which we know Congress and the Commission would sedulously seek to avoid.
Our feeling is that there is nothing emergent in the present investment situation to warrant undue haste in the passage of a bill embodying such a drastic change in fundamental public policy involving publice reliance on governmental approval of this nature and having such far-reaching effects. We would therefore respectfully suggest a more careful consideration of the implications of this bill and a more detailed study of the practice of other countries in legislation of this nature, with a view to the passage of a bill which would render true protection to investors and at the same time be less deleterious in its effect on the investing public, on corporate obligors, and on the investment-banking business. For such study and consultation the members of the Investment Bankers Association stand entirely ready to place at the disposal of the Senate Committee on Banking and Currency their experience, their facilities, and their unstinted cooperation.
We respectfully submit this, and appreciate your having heard it.
Does that cover your point, Senator Barkley, as to the fundamental difference in concept between the Securities Act of 1933, as amended, and the present bill?
Senator BARKLEY. I understand the point you make.
Mr. BUTTENWIESER. On the one hand, under the Securities Act, there is no representation, implied or direct, that the Commission has passed on any of the information made available. It simply says that it is all set out, and the investor can judge for himself. Under this bill, as we read it, there is a rather direct implication that the Commission will have to pass upon the merits of the provisions of the respective indentures.
Senator HITCHCOCK. In other words, you have reference to the language "which the Commission shall deem adequate"? Is that what you have reference to?
Mr. BUTTENWIESER. Yes; and the other language we have quoted.
Senator BARKLEY. The bill provides that these indentures shall contain certain provisions. That does not necessarily mean that the Commission approves of the indenture, but if it is to be issued, and a trustee is to be appointed, it shall contain the provisions set out in the bill, designed to protect those who had no opportunity to sit in at the inception of the indenture, or with regard to its terms, and who, in many cases, do not take the trouble, or could not understand all the legal phraseology involved in an indenture of many pages. It is provided that the indenture itself shall contain certain provisions. I do not see where that implies that the Commission has approved the issue of the indenture or in any way sanctioned it, so far as its liability or responsibility is concerned. It just simply provides that if those indentures are issued, these stipulations shall be set out in them, so that those who invest their money in the indentures may more readily understand what they are buying.
Senator ADAMS. May I supplement what Senator Barkley has said? I have gathered from your statement that this bill merely has to do