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with the form of the indenture, and that that is what is submitted; that is, that there is not submitted any statement as to the property to be covered by the indenture.
Mr. BUTTENWIESER. It is more than just a form, Senator. It is the form and the actual provisions.
Senator ADAMS. Does it in any way submit to the Securities and Exchange Commission the securities which are to be covered by the indenture, either as to whether they are accurately described or whether there is any misrepresentation with reference to them? That is done under the Securities and Exchange Commission now; that is, they now, to a certain extent, pass upon information. That is, thé full information is furnished of the financial set-up of the company and the assets which are to be covered, but, as I understand it, this bill has to do with the form of the indenture only.
Mr. BUTTENWIESER. You are quite right. It has to do with the form, but it goes one step further. It has to do with the actual provisions—not merely their form, but the actual provisions to be inserted in such indenture. Take a concrete example, for instance. It is quite usual to have
Senator HITCHCOCK. Just a minute. If the State has a code saying that you shall do certain things, you do not mean to say that the State of New York, for example, guarantees any indenture that is made according to the provisions of that code, do you?
Mr. BUTTEN WIESER. So far as I am aware, we have no code that is analogous to this. Do you refer to the Martin Fraud Act in New York?
Senator HITCHCOCK. Yes.
Mr. BUTTENWIESER. I do not think it is analogous to this. What I was trying to indicate is this: It is quite the common practice to have an indenture-say a first mortgage on a steel plant-which says securities can be issued for 75 percent of the cost or fair value of an addition or improvement. Under this bill, as we read it, it is well within the power of the Securities and Exchange Commission-we do not anticipate that they will use it, of course, but it is there, as we see it—to say, "We think 75 percent on a steel mortgage is too high. You should only have releases up to 66% percent of the cost or fair value.” That is the difference between adjective superintendency of it and dictating the substantive provisions of an indenture. That is what we sought to make clear in the memorandum, and we assume it is the latter power that Congress would not want to delegate to any commission.
Senator BARKLEY. I think, if you will examine the new print of the bill, you will find that we have met, to some extent, some of the objections you raise. We have gone over it since the testimony was closed the other day.
I would like to have you look over this committee print No. 3. I think you will find that some of the matters you discuss have been clarified.
Mr. BUTTENWIESER. I am glad they have, because that lends more substance to the points we have made.
Senator TOWNSEND. Would you care to go over this print and drop a line to the members of the committee giving your views on the print as it has been changed?
Mr. BUTTENWIESER. I should be very glad to.
Senator LODGE. You have not yet seen this committee print No. 3?
Mr. BUTTENWIESER. I did see it for a moment, outside the hearing room this morning, but not sufficiently to know whether the points we have raised are adequately covered in that.
I apologize again for having been late on this, because the committee was pretty well scattered.
The CHAIRMAN. We had closed the hearings, but I appreciate the fact that you represent very substantial interests, and we wanted to get the benefit of your views and experience.
Mr. BUTTENWIESER. Thank you very much for permitting me to make known our views.
If there are any other questions, I shall be glad to answer them, or I shall be glad to go over this new print and submit a second memorandum.
Senator LODGE. Will Mr. Buttenweiser have further opportunity to appear before the committee, after he has read the new print?
The CHAIRMAN. Can you not transmit in writing your views, if they are modified as a result of the new print?
Mr. BUTTENWIESER. Yes.
The CHAIRMAN. You can understand that if we continue these hearings indefinitely, we will never get to the point of actual consideration. We have had 4 days of hearings.
Senator BARKLEY. More than that.
Mr. BUTTENWIESER. I can well appreciate that; and, from previous experience before this same committee, I know it gets warm down here.
The CHAIRMAN. We have gone over it pretty thoroughly.
Senator BARKLEY. I hope Mr. Buttenweiser can send a brief memorandum to the committee if he finds any occasion, in the new print, to modify his views. I think he will find it.
Mr. BUTTENWIESER. I hope so.
I assume you have no objection, Senator Barkley, or Senator Lodge, to our submitting suggestions over and beyond that, if we think the points we raise are not adequately covered in your reprint?
Senator BARKLEY. We would like to have these hearings printed as soon as possible, so that members of the committee can have them available to study. This is a very technical bill, as you know, and it takes a considerable amount of study to get into the meat of it. I would not like to have the hearings delayed.
The CHAIRMAN. You are the last witness who has asked to be heard on this proposition, who represents any substantial interest, so that I think we are in a position where we can close the hearings now.
However, I should like to have you read over that committee print No. 3 today, and, if you have any modification of your views, or other views you want to present, send us a memorandum.
Mr. BUTTENWIESER. Very well. We can send it to you by tomorrow, or Thursday at the latest.
Senator Lodge. May I ask one more question? Is it your opinion that this bill would tend to decrease the amount of business that is now being done in the way of financing, and so forth? Would it have a restrictive effect on the total volume?
Mr. BUTTENWIESER. It might, very conceivably. It could have that effect, from quite another viewpoint, not merely investment banking. I can conceive of it having a very substantial effect, through its restrictions, in smaller communities, where it might be very difficult to meet the various conflicts of interest which have been enunciated in this bill, but which we have not considered particularly, because we know the American Bankers Association has considered them.
Senator BARKLEY. As a matter of fact, if there is any real need for the issue of these debentures for the financing or refinancing of any concern, and the public can more easily obtain information and facts, and understand what they are, would not that tend to greater confidence, and increase rather than restrict the amount of money that might be invested?
Mr. BUTTENWIESER. Senator Barkley, any bill which has as its fundamental concept the greater publicity of all the terms of an indenture or security is a bill which has our wholehearted support. We ardently will champion any bill or any type of legislation which will provide for greater publicity to the investing public, so that the man who buys will know what he is receiving.
Our point is that we think it is unwise and unsound to delegate to any governmental organization the right or power to fix the substantive provisions of any indenture or of any security.
Senator BARKLEY. You do not think Congress could do that? It has to be delegated to somebody, or not exercised at all, because it would be impossible for Congress to sit around the table and help write up every indenture, and fix its terms. If there is any regulation at all of the contents of these indentures, it must be done by somebody to whom the authority is delegated.
Mr. BUTTENWIESER. That is perfectly true; but our point is that we feel that Congress is going as far as it would want to go or should go if it delegates to an organization like the Securities and Exchange Commission, which is eminently qualified to do that, the duty of seeing that the terms that have been agreed upon are adequately portrayed to the investing public; in other words, that there are no jokers in it, and that what the buyer thinks he is getting he is actually purchasing. That is why we feel that the Securities Act has been very beneficial.
The CHAIRMAN. You mean it ought to be limited to approval or disapproval?
Mr. BUTTENWIESER. It ought to be limited, we think, Senator Wagner, to an adequate description of the terms which have been agreed upon between the initial purchaser and the initial seller.
Senator BARKLEY. There is a difference between the nature of these securities and the ordinary stocks issued by corporations to get more money. Here you have the question of the trustee involved, where he or it may have conflicting interests. One of the objects of this bill is to make it the primary duty of the trustee to look after the investors whom he represents. You do not have that same situation in the ordinary issue of stocks, where all that is necessary is for the investor to know the condition of the company or its resources, and all those things. But there may be hidden clauses in one of these long indentures that form a loophole by which the trustee may escape the performance of his real duty or, if there is any conflict between the investor and somebody else, he may have to choose which one he will serve.
Mr. BUTTEN WIESER. We are wholeheartedly in accord with that, and you will notice that our memorandum did not touch on any of that, Senator Barkley, because we have not the slightest quarrel with that.
The CHAIRMAN. Thank you very much.
ADDITIONAL MEMORANDUM SUBMITTED BY THE INVESTMENT BANKERS Associ
ATION 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 ecial 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 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
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.
INVESTMENT BANKERS ASSOCIATION OF AMERICA,
SPECIAL COMMITTEE ON TRUST INDENTURES,
MILTON C. Cross,
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