ADDITIONAL MEMORANDUM SUBMITTED BY THE INVESTMENT BANKERS ASSOCIATION OF AMERICA SPECIAL COMMITTEE ON TRUST INDENTURES The Investment Bankers Association of America, through its special committee on trust indentures, desires to express its appreciation of the courtesy of the Senate committee in having permitted the special committee to convey to the Senate committee the views of the association with regard to this bill and for the further courtesy of asking the special committee to submit a further memorandum conveying its views with regard to the redraft of this bill, namely, committee print No. 3 of June 29, 1937. While we are gratified to note from careful study of this redraft that it embodies substantial improvements over previous drafts, in that it limits the scope of the matters to be determined by the Securities and Exchange Commission, we regret to note that the chief objection to the bill raised by the Investment Bankers Association in its memorandum of June 28, 1937, as enunciated on page 8 of that memorandum, has not been met; namely, that 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. We do not find that the new draft has changed this aspect of the bill, except, as stated above, to limit somewhat the matters in respect of which the Commission's approval is necessary. The bill still proceeds on the theory of an approval statute and this, we believe, is an unfortunate departure from the concept of previous legislation. We believe that the observations set forth in our previous memorandum with regard to the effect of such a statute continue to apply to the revised bill. Our other observation with regard to committee print No. 2 has, to some extent, been met by the changes embodied in committee print No. 3, namely, that the Securities and Exchange Commission no longer has, to as great a degree, the powers enumerated on page 2 of our previous memorandum to dictate the terms, covenants, and provisions of any indenture to be registered with it. We believe that the changes made in committee print No. 3 in the redrafting of section 7 (m) has somewhat circumscribed these powers of the Securities and Exchange Commission. However, we feel that the following language in that section still reserves to the Securities and Exchange Commission powers which, if arbitrarily exercised, might be against public policy. We refer to section 7 (n) (p. 41, lines 2 to 5, 8 to 10, 18, and 19) wherein it is stated that * * * "The indenture to be qualified shall contain provisions which the Commission shall deem adequate * * * in respect of the following matters; the definition of what shall constitute a default thereunder * * (and) the duties of the trustee with respect to * * * calling meetings of the indenture security holders." We have merely enumerated certain parts of this section which we believe fall into that category but there are similar parts which we might cite in this section and elsewhere throughout the bill which we feel should be more precisely limited. Of this type we would again refer to sections 7 (g) and 7 (g) (4) (p. 35, lines 4, 5, and 11, and p. 36, lines 1 to 4) which, as stated on page 6 of our previous memorandum, reads as follows: * "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 would also again urge, for the reasons set forth in our previous memorandum, a reconsideration of article 5 of the preamble to the bill wherein it recites, in sections 1 (a) and 1 (a) (5) (p. 2, lines 1, 2, and 6, and p. 4, lines 3 to 7) that"It is hereby declared that the national public interest and the interest of inves tors * * * 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 * * * "" * * * We urge that this be either eliminated or drastically changed. For the reasons stated in our previous memorandum, we believe the very practicalities of the situation demonstrate that this is not the fact and in support of this view, namely, that the safeguarding of the interests of investors may well be entrusted to the issuing bankers who negotiate the terms of a trust indenture and the securities to be issued under it, we quote the following from an article by Mr. Jesse H. Jones which appeared in the Saturday Evening Post of June 26, 1937: "The banker whose business it is to make loans to sell is apt to favor the investor at the expense of the borrower * * * "" In this connection we would reiterate the statement contained in our previous memorandum, namely, that "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." Summarizing, we regret that, even though we find the redrafted bill as embodied in committee print No. 3 contains some improvement over committee print No. 2, in view of the basic objections set forth herein and in our previous memorandum, we do not feel warranted in approving the bill even in its present revised form. We hope, therefore, that the Committee on Banking and Currency will carefully weigh the views presented in these two memoranda to the effect that 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 and that the fundamental principle of such legislation should be full disclosure rather than approval. Respectfully submitted. JULY 1, 1937. INVESTMENT BANKERS ASSOCIATION OF America, MILTON C. CROSS, ALLEN N. JONES, KARL WEISHEIT, GEORGE D. WOODS. The CHAIRMAN. At the request of Senator Barkley there will be included in the record at this point a copy of committee print No. 3 and an analysis thereof. (The bill and statement referred to are as follows:) [S. 2344, 75th Cong., 1st sess., Committee Print No. 3, June 29, 1937] [Changes from Committee Print No. 2 are indicated by black brackets and italics] 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 [and] the trust indentures under which the same are issued, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Trust Indenture Act of 1937." NECESSITY FOR REGULATION [SECTION] SEC. 1. (a) Upon the basis of facts disclosed by the reports of the Securities and Exchange Commission made to the Congress pursuant to section 211 of the Securities Exchange Act of 1934 and otherwise disclosed and ascertained, it is hereby declared that the national public interest and the interest of investors in notes, bonds, debentures, and evidences of indebtedness publicly offered by the use of means and instruments of transportation and communication in interstate commerce and of the mails are adversely affected (1) When the obligor fails to provide a trustee to protect and enforce the rights and to represent the interests of such investors, notwithstanding the fact that (A) individual action by such investors for the purpose of protecting and enforcing their rights is rendered impracticable by reason of the disproportionate expense of taking such action, and (B) concerted action by such investors in their common interest through representatives of their own selection is impeded by reason of the wide dispersion of such investors through many States and the fact that information as to the names and addresses of such investors is controlled by the obligor and underwriters; (2) When the trustee designated does not have adequate rights and powers, or adequate duties and responsibilities, in connection with matters relating to the protection and enforcement of the rights of such investors; when, notwithstanding the obstacles to concerted action by such investors, and the general and reasonable assumption by such investors that the trustee is under an affirmative duty to take action for the protection and enforcement of their rights, trust indentures generally provide that the trustee shall be under no duty to take any such action, even in the event of default, unless it receives notice of default, demand for action, and indemnity, from the holders of substantial percentages of the outstanding securities, and generally relieve the trustee from liability even for its own negligent action or failure to act; (3) When the trustee designated does not have resources commensurate with its responsibilities, or has any relationship to or connection with the obligor or any underwriters of any securities of the obligor, or holds, beneficially or otherwise, any interest in the obligor or any such underwriter, which relationship, connection, or interest involves a material conflict, actual or potential, with the interest of such investors; (4) When the obligor is not obligated to furnish to the trustee and to such investors adequate current information as to its financial condition and the performance of its obligations with respect to such securities; or when the communication of such information to such investors is impeded by the fact that information as to the names and addresses of the holders of such securities is controlled by the obligor and underwriters; or (5) 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, which are commonly prepared by the obligor or underwriters. (b) Abuses of the character above enumerated have been so widespread that the public offering of such securities, unless regulated, is injurious to the capital markets, to investors, and to the general public; and it is hereby declared to be the policy of this Act, in accordance with which policy all the provisions of this Act shall be interpreted, to meet the problems and eliminate the evils, as enumerated in this section, connected with the public offering of such securities by the use of means and instruments of transportation and communication in interstate commerce and of the mails. DEFINITIONS SEC. 2. When used in this Act, unless the context otherwise requires (1) Any term defined in section 2 of the Securities Act of 1933, as heretofore amended, and not otherwise defined in this section, shall have the meaning proIvided in such section 2. (2) The term "sale" shall include all transactions included in such term as provided in paragraph (3) of section 2 of the Securities Act of 1933, as heretofore amended, except that a sale of a certificate of interest or participation shall be deemed a sale of the security or securities in which such certificate evidences an interest or participation if and only if such certificate gives the holder thereof the right to convert the same, either immediately or on or after some future date, into such security or securities. (3) The term "underwriter" means any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (4) The term "director" means any director of a corporation or any individual performing similar functions with respect to any person whether incorporated or unincorporated. (5) The term "executive officer" means the president, every vice president, the cashier, secretary, treasurer and trust officer and any person customarily performing similar functions. (6) The term "indenture" means any mortgage, deed of trust, trust or other indenture, or similar instrument or agreement (including any supplement or amendment to any of the foregoing), under which securities are outstanding or are to be issued, whether or not any property, real or personal, is or is to be pledged, mortgaged, assigned or conveyed thereunder. (7) The term "application" or "application for qualification" means the application provided for in section 5, and includes any amendment thereto and any report, document or memorandum accompanying such application or incorporated therein by reference. (8) The term "indenture to be qualified" means the indenture in respect of which a particular application is filed. (9) The term "indenture trustee" means each trustee under the indenture to be qualified, and each successor trustee. (10) The term "indenture security" means any security issued or to be issued under the indenture to be qualified. (11) The term "obligor" means every person who is liable upon any such security, and, if such security is a certificate of interest or participation, [includes] means also every person who is liable upon the security or securities in which such certificate evidences an interest or participation; but such term shall not include the trustee under an indenture under which certificates of interest or participation, equipment trust certificates, or like securities are outstanding. (12) The term "paying agent", when used with respect to any such security, means any person authorized by an obligor thereon to pay the principal of or interest on such security on behalf of such obligor, or in the case of certificates of interest or participation, on behalf of the trustee. (13) The term "State" means any State of the United States. (14) The term “Commission” means the Securities and Exchange Commission. (15) The term "voting security" means any security presently entitling the owner or holder thereof to vote in the direction or managmeent of the affairs of a person, or any security issued under or pursuant to any trust, agreement, or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person; and a specified per centum of the outstanding voting securities of a "person" means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified per centum of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. [(16) The term "voting security" means a security presently entitling the holder or owner thereof to vote for the election of directors.] (16) The terms "Securities Act of 1933", "Securities Exchange Act of 1934" and "Public Utility Holding Company Act of 1935" shall be deemed to refer, respectively, to such Acts, as heretofore or hereafter amended. EXEMPTED SECURITIES AND TRANSACTIONS SEC. 3. (a) The provisions of this Act shall not apply to any of the following securities: (1) Any security other than a note, bond, [debenture,] debenture, or evidence of indebtedness, whether or not secured, or a certificate of interest or participation [in] therein, or temporary certificate for, or guarantee of, any of the foregoing. (2) Any certificate of interest or participation in two or more securities having substantially different rights and privileges, or a temporary certificate for, [or guarantee of,] any such certificate. (3) Any security which, prior to [January 3, 1938] or within six months after the enactment of this Act, has been sold or disposed of by the issuer or bona fide offered to the public, but this exemption shall not apply to any new offering of any such security by an issuer [or underwriter on or after such date] subsequent to such six months. (4) Any security exempted from the provisions of the Securities Act of 1933, by paragraphs 2, 3, 4, 5, 6, 7, 8, or 11 of subsection 3 (a) of such Act, as heretofore amended. (5) Any security issued under a mortgage indenture as to which a contract of insurance under the National Housing Act is in effect. (6) Any note, bond, debenture, or evidence of indebtedness of a foreign government or of a subdivision, department, municipality, agency, or instrumentality thereof. [(6)] (7) Any guarantee of any security exempted from the provisions of this Act by this subsection. (b) The provisions of section 4 shall not apply to any of the transactions exempted, by section 4 of the Securities Act of 1933, as heretofore amended, from the provisions of section 5 of such Act. For the purposes of this subsection the term "underwriter", as used in section 4 of such Act, shall have the meaning provided in paragraph (3) of section 2 of this Act. (c) The Commission may from time to time by rules and regulations, and subject to such terms and conditions as may be prescribed therein, add any class of securities to the securities exempted in subsection (a) of this section, if it deems that the application of this Act with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved and the small amount of securities outstanding and thereafter issuable under the same indenture, or the limited character of the public offering; but no issue of securities shall be exempted under this subsection where the aggregate amount [of] at which such issue is offered to the public exceeds $250,000. (d) The Commission may, on application by the issuer and after opportunity for hearing thereon, by order exempt from any one or more provisions of this Act any security issued or proposed to be issued under an indenture under which, at the time of such issuance, securities referred to in paragraph (3) of subsection (a) of this section are outstanding, if and to the extent that it finds that compliance with such provision or provisions, through the execution of a supplemental indenture or otherwise (1) would require by reason of the provisions of the indenture, or of any other indenture or agreement made prior to the [effective date] enactment of this Act, or by reason of the provisions of any applicable law, the consent of the holders of securities outstanding thereunder, or (2) would impose an undue burden on the issuer, having due regard to the public interest and the interests of investors. PROHIBITIONS RELATING TO INTERSTATE COMMERCE AND THE MAILS SEC. 4. (a) Subject to the provisions of section 3, unless a security has been or is to be issued under an indenture as to which an application for qualification is effective, it shall be unlawful for any person, directly or indirectly— (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale. (b) Notwithstanding the provisions of the Securities Act of 1933, [on and after January 3, 1938] subsequent to six months after the enactment of this Act, no registration statement relating to a security which is subject to the provisions of subsection (a) of this section shall become effective unless such security has been or is to be issued under an indenture as to which an application for qualification is effective. APPLICATIONS FOR QUALIFICATION AND THE TAKING EFFECT THEREOF SEC. 5. (a) An application for qualification of the indenture under which a security has been or is to be issued shall be filed with the Commission by the issuer of such security. Such application shall be in such form, and shall be signed in such manner, as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors. Such application shall include such of the information and documents as would be required to be filed in order to register such security under the Securities Act of 1933, and such additional information, in such form and detail, and such documents, regarding the applicant, the obligors, the trustees, the paying agents and the underwriters (as such term is defined in subsection (b) of section 7), including prospective obligors, trustees, and underwriters, and the direct or indirect relationships between any of the foregoing, as the Commission may by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors. [The] Subject to the provisions of section 10, the information and documents contained in or filed with any application shall be made available to the public under such regulations as the Commission may prescribe, and copies thereof, photostatic or otherwise, shall be furinshed to every applicant therefor at such reasonable charge as the Commission may prescribe. (b) The filing with the Commission of an application, or of an amendment to an application, shall be deemed to have taken place upon the receipt thereof by the Commission, but unless a registration statement, under the Securities Act of 1933, covering securities issued or to be issued under the indenture to be qualified has been filed prior to or simultaneously with the application, the filing of such application shall not be deemed to have taken place unless it is accompanied or preceded by payment to the Commission of a filing fee in the amount of $100, such payment to be made in cash or by United States postal money order or certified or bank check, or in such other medium of payment as the Commission may authorize by rule and regulation. If a registration statement covering securities issued or to be issued under such indenture is subsequently filed, the amount of the fee so paid shall be credited against the fee required to be paid at |