respect to combined capital and surplus authorized by the last sentence of paragraph (2) of subsection (a) of such section 7, to determining whether such prospective trustee is eligible to act as such under such paragraph (2).

COURT REVIEW OF ORDERS; JURISDICTION OF OFffenses 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, having due regard to the merits and good faith of the suit or defense. 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 remain 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 an 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.

S. 2344, TRUST INDENTURE ACT OF 1937, ANALYSIS OF COMMITTEE PRINT No. 3

The following is an analysis of committee print no. 3 of the Trust Indenture Act of 1937 (S. 2344) introduced by Senator Barkley on May 6, 1937, and referred to the Committee on Banking and Currency. Committee print no. 3 indicates, by line type and italics, suggested changes in committee print no. 2 of June 10, 1937, which is the print on which the public hearings were held. Minor changes, including typographical corrections, will not be discussed in this analysis.

TITLE

The change which has been made in the long title is designed merely to call attention to the fact that the bill is based not only on the commerce power but also on the mail power.

SECTION 1. NECESSITY FOR REGULATION

The words stricken through in subsection (b) of this section have been omitted as being unnecessary.

SECTION 2. DEFINITIONS

The change made in the last clause of the definition of the term "obligor" (11) is intended to make clear that the trustee under an issue of certificates of interest or participation is not itself to be regarded as an obligor, merely by reason of the fact that it agrees to pay over to the certificate holders moneys received from the obligor on the underyling security or securities. Otherwise the trustee would be

disqualified from acting as such by section 7 (b) (2).

The clause added to the definition of the term "paying agent" (12) makes clear that a person who makes principal or interest payments on certificates of interest or participation, on behalf of the trustee thereunder, is also a "paying agent."

The definition of the term "voting security" (15) has been changed to conform to that contained in section 2 (a) (17) of the Public Utility Holding Company Act of 1935. The test now is the right to vote in the direction or management of the affairs of the "person" in question, rather than the right to vote for the election of directors. The new definition makes clear that the expression "percentage of the voting securities" has reference to the voting power, and not to the number of shares.

SECTION 3. EXEMPTED SECURITIES AND TRANSACTIONS

The changes made in paragraph (1) of subsection (a) are for purposes of clarification only.

The words stricken through in paragraph (2) are unnecessary, in view of the provisions of paragraph (7) thereof.

Under the change made in paragraph (3), the qualification requirements of the Act are to become effective 6 months after its enactment. This change was thought desirable in view of the impossibility of estimating in advance the date of enactment.

The new paragraph (6) exempts obligations of foreign governments and subdivisions. Substantially different considerations apply to such issues.

SECTION 4. PROHIBITIONS RELATING TO INTERSTATE COMMERCE AND THE MAILS

The change made in subsection (b) corresponds to that made in paragraph (3) of subsection (a) of section 3.

SECTION 5. APPLICATIONS FOR QUALIFICATION AND THE TAKING EFFECT THEREOF The change made in the last sentence of subsection (a) makes clear that the provisions of that sentence are subject to the restrictions upon disclosure contained in section 10.

The sentence added to subsection (c) specifically confers upon the applicant the right to withdraw its application at any time prior to the effective date thereof. The Supreme Court of the United States recently held that an "applicant" has that right under the Securities Act.

The last eight words of subsection (d) have been omitted as being unnecessary. The change made in subsection (e) is designed to make clear what was originally intended, namely, that the term "underwriter", as used in this subsection, means only underwriters of the securities in respect of which the application is filed. Underwriters of other outstanding securities of the issuer or obligor are not included.

SECTION 6. REFUSAL ORDERS

The change made in the last clause of paragraph (5) makes clear that the Commission does not have, under this clause, a general power to require the elimination of indenture provisions where it deems such elimination shall be necesssary or appropriate in the public interest or for the protection of investors, but that such power is confined to cases in which such elimination is deemed necessary or appropriate to prevent the circumvention or evasion of the act.

SECTION 7. CONTENTS OF INDENTURE

Subsection (a): Persons eligible for appointment as trustee.-The changes and additions made in paragraphs (2) and (3) of this subsection are for purposes of clarification only.

Subsection (b): Disqualification of trustee.-The changes made in paragraph (1) of this subsection are also for purposes of clarification.

The purposes of the language eliminated from paragraph (2) are covered by the changes made in the very last sentence of this subsection.

The change made in the first line of paragraph (6) is to conform to the language used in the other paragraphs of this subsection. The specific exclusion of creditor relationships arising from the ownership of "securities"-which term is defined at a later point in this subsection as meaning "corporate securities"-makes clear that such a creditor relationship does not ipso facto constitute a conflicting interest. Of course, ownership of such securities is still subject to the percentage limitations contained in paragraphs (7) to (10), inclusive.

The change made in paragraph (7) gives recognition to the fact that if a trustee is permitted by paragraph (1) of this subsection to act as trustee under more than one indenture, there is no reason why the ownership by the trustee of securities issued under any of such indentures should be deemed to constitute a conflicting interest.

The first proviso following paragraph (10) has been changed so as to apply to paragraph (6) as well as to the other paragraphs mentioned in the proviso. The new clause (B) makes clear that a trustee under a collateral trust indenture under which a principal default has occurred is not to be regarded as having a conflicting interest merely by reason of its holding of other securities as collateral security thereunder.

The change made in the last paragraph of subsection (b) offsets the change made in paragraph (2) of that subsection.

Subsection (c).-This is the subsection which is designed to eliminate competition between a trustee, who is also a creditor of the obligor, and the bondholders he represents, during and after the 4-months' period preceding a principal or interest default under the indenture. It requires the trustee to account for any improvement in its own position after the beginning of such period. The effect of the new matter inserted in the second line of this subsection is to exclude from the accounting requirement a creditor relationship arising from the ownership or acquisition of securities which are themselves issued under an indenture.

The accounting requirements have been subjected to some simplification and rearrangement but the effect is exactly the same as in the original bill.

The changes made in the last paragraph of the subsection are designed to cover the situation where the trustee is authorized, by paragraph (1) of subsection (b), to act as trustee under two or more indentures, all of which are in default. The accounting requirements then come into operation 4 months prior to the earliest default, and the holders of securities outstanding under all of such indentures are entitled to the benefits thereof.

Subsection (d).-The change made in paragraph (1) corresponds to that made in paragraph (7) of subsection (b). If trusteeship under another indenture does not constitute a conflicting interest under paragraph (1) of subsection (b), the trustee should not be subject to the accounting requirements with respect to its holdings of securities issued under such other indenture.

The new paragraph (5) exempts from the loan conflict provisions and the accounting provisions a creditor relationship arising from the ownership of securities of "Edge Act" corporations, which are comparatively few in number and are engaged almost exclusively in the financing of foreign trade.

The substance of the former paragraph (5) of this section is covered by the new final paragraph. The power to exclude "self-liquidating paper" is now expressed in terms of exemption, rather than in terms of definition.

Subsection (f): Bondholders' lists.-The changes made in this subsection go far toward meeting some of the objections raised at the hearings. The trustee is now to be under a specific duty to preserve all information as to names and addresses of bondholders furnished to it by the obligor or its paying agents, and any such information received by the trustee itself in the capacity of paying agent.

Subsection (g): Duties of the trustee prior to default.-The matter stricken in paragraph (1) of this subsection has been eliminated as being unnecessary,

Subsection (h): Duties of the trustee in case of default.-The change made in the opening clause is merely for purposes of clarification. The substance of the former paragraph (3) is covered by the clause added to subsection (j).

Subsection (i): Reliance upon certificates and opinions.-The change made in this subsection makes clear that the protection afforded by opinions and certificates of attorneys and other experts extends to the correctness of the opinions expressed therein.

Subsection (j): Exculpatory clauses.-The clause added to this subsection covers the ground covered by paragraph (3) of subsection (h), which has been eliminated; it applies the principles of that paragraph to the situation existing prior to default as well as after default; and it makes special provision with respect to losses arising from errors of judgment. If the trustee was not negligent in ascertaining the pertinent facts, it is protected for losses arising from any error of judgment based upon such facts, if such judgment was made in good faith by responsible officers of the trustee.

Subsection (m): Release and substitution; issuance of additional securities; satisfaction and discharge. This subsection covers the territory formerly covered by paragraph (1) of subsection (m). This provision, as revised, makes clear that the Commission is to pass merely upon the adequacy of the restrictions and conditions upon provisions of this class, and is to do so in the light of the bargain of the parties.

Subsection (n): Other identure provisions. Here again the emphasis is shifted to the adequacy of provisions of the identure with respect to the matters enumerated in this subsection.

Paragraphs (1) and (2) correspond to paragraphs (2) and (3) of the former subsection (m). Some control over the definition of what shall constitute a default under the identure is necessary, in order that the gains made by imposing active duties upon the trustee in case of default shall not be nullified by including in the identure a much more restricted definition of the term "default" than is now properly contained in the better identures.

Paragraphs (3), (4), and (5) cover the matters covered by paragraph (4) of the former subsection (m). The identure must contain adequate provisions with regard to the duties of the trustee with respect to the matters enumerated in paragraph (3). Paragraph (4) makes clear what was originally intended, namely, that the Commission is not to attempt to spell out in advance the specific duties of the trustee with respect to the matters enumerated in this paragraph. The general duty of the trustee with respect to these matters is set forth in subsection (h). But the indenture must contain adequate provisions with respect to the trustee's rights and powers with regard to these matters, if the provisions of subsection (h) are not to be nullified by denying to the identure trustee rights and powers which the better identures of the present day contain and should contain.

Paragraph (5) takes the place of clause (D) of paragraph (4) of the former subsection (m).

Paragraphs (6) and (7) correspond to paragraphs (5) and (6) of the former subsection (m).

SECTION 8. RULES, REGULATIONS AND ORDERS

The elimination of the word "and" in the fifth line of subsection (a) makes clear that the Commission's authority to make rules, regulations and orders is confined to rules, regulations and orders to carry out the provisions of the act. The changes made in the last clause of the second sentence deny to the Commission the power to prescribe or recommend forms of indentures, and make clear that the Commission's power to prescribe or recommend forms of indenture provisions is restricted to provisions required or permitted to be included pursuant to section 7. The effect of this clause as revised is to make clear that the Commission has authority to exercise its powers under section 7 by rules and regulations of general application to the classes of indentures and securities affected thereby.

SECTION 10. SPECIAL POWERS OF THE COMMISSION

The changes suggested in subsections (b) and (c) have been worked out in conference between representatives of the Commission, of the several governmental agencies having supervisory authority over banks, and of the banks themselves. The changes made in subsection (b) tighten up the provisions with respect to the disclosure of reports made available by the supervisory authorities, communications between trustees or prospective trustees and the supervisory authorities, etc.

The changes made in the last paragraph of subsection (c) limit the Commission's powers of investigation of a prospective trustee to determining whether such trustee is qualified to act as such under the provisions of subsection (b) of section 7, or is eligible to act as such under paragraphs (1) and (2) of subsection (a) of section 7. If the indenture contains the provision authorized by the last sentence of such paragraph (2), the Commission's powers with respect to the determination of the combined capital and surplus of a prospective trustee are confined to requiring that there be furnished a copy of its most recent report of condition published pursuant to law or to the requirements of the appropriate supervisory authority.

SECTION 12. LIABILITY FOR MISLEADING STATEMENTS

The original provision with respect to undertakings for costs contained in the next to last sentence of subsection (a), was identical with the corresponding provision of section 18 (a) of the Securities Exchange Act of 1934. To this sentence has been added a provision to the effect that if the court in its discretion requires such undertaking or assesses costs, due regard is to be had to the merits or good faith of the suit or defense.

The CHAIRMAN. If there is nothing further, the hearings are closed. (Whereupon, at 12:10 p. m., the hearings were concluded.)

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