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CONTENTS

Statement of -

Page

Barkley, Hon. Alben W., senior Senator from Kentucky-

16

Bradley, Charles B., general solicitor, Prudential Insurance Co. of

America, Newark, N. J.

91, 93

Brown, Edward E., president, First National Bank, Chicago, Ill.--- 122

Burke, Edmund, Jr., member of the staff of the Securities and Exchange

Commission, Washington, D. C.---

41

Buttenwieser, Benjamin J., chairman, Investment Bankers Associa-

tion of America Special Committee on Trust Indentures, New York

City

185

Canright, G. S., counsel for the corporate trust division, Continental

Illinois National Bank & Trust Co. of Chicago, Ill..

131.

Douglas, William O., commissioner, Securities and Exchange Com-
mission, Washington, D. C.--

17
Hanes, Robert M., chairman, committee on federal legislation of

the American Bankers Association, and president of the Wachovia
Bank & Trust Co., Winston-Salem, N. C..

87

Loeb, Howard A., chairman, Tradesmen’s National Bank & Trust Co.,

Philadelphia, Pa.

146

McCollom, H.C., New York City

156

Oliver, Fred N., general counsel, National Association of Mutual

Savings Banks, 60 East Forty-second Street, New York City -

148

Page, R. G., vice president, Bankers Trust Co., New York City. 88, 154

Posner, Louis S., member of the Mortgage Commission of the State

of New York, New York City--

108

Ransom, Ronald, vice chairman, Board of Governors of the Federal

Reserve System, Washington, D. C.

107

Tilney, A. A., chairman of the board of directors, Bankers Trust Co.,

New York City

89, 92

Untermyer, Samuel, New York City

94

Exhibits:

Committee Print No. 2.

1

Analysis thereof.

77

Committee Print No. 3.

196

Analysis thereof..

211

Letter from the President of the United States-

15
Table submitted by the Securities and Exchange Commission..

42

III

REGULATION OF SALE OF SECURITIES

WEDNESDAY, JUNE 9, 1937

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,
SECURITIES AND EXCHANGE SUBCOMMITTEE,

Washington, D. C. The subcommittee met, pursuant to call, at 10:30 a. m., in the room of the Senate Committee on Banking and Currency, Senate Office Building, Senator Robert F. Wagner (chairman) presiding.

Present: Senators Wagner (chairman), Bulkley, McAdoo, Maloney, Hughes, Herring, and Frazier.

Present also: Senators Alben W. Barkley and William H. Smathers.

The CHAIRMAN. We will come to order. This is the subcommittee which meets to hear witnesses in reference to Senate bill 2344, introduced by Senator Barkley.

I wish to have printed here as a part of the record, a copy of Committee Print No. 2 of the bill, and a letter I have received from the President in regard to the proposed legislation, as follows:

(S. 2344, 75th Cong., 1st sess., Committee Print No. 2, June 10, 1937.]

(Omit the part enclosed in black brackets and insert the part printed in italic) A BILL To provide for the regulation of the sale of certain securities in interstate and foreign commerce,

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 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 obtaining of adequate current information with respect to the financial condition of the obligor and its performance of its obligations. with respect to such securities, and the enforcement of such obligations, is. impeded through the failure to provide a trustee to protect and enforce the rights and to represent the interests of such investors; when the trustee: designated does not have resources commensurate with its responsibilities, or has any relationship to or connection with the obligor or any underwriter 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 interests of such investors;

[(2) when the trustee 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, by reason of provisions exculpating the trustee from liability for its failure to exercise its rights and powers or to discharge its duties and obligations, the protection afforded to such investors is rendered illusory; or

1

[(3) 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, and concerted action by such investors in connection with the enforcement of the obligations of the obligor and the trustee, is impeded by the suppression and monopolization by the obligor, underwriters or others of information as to the names and

addresses of the holders of such securities. [(b) When abuses of the character above enumerated become persistent and widespread, the public offering of such securities, unless regulated, is injurious to the capital markets, to investors, and to the general public, and is tantamount to a fraud on such investors and 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. ]

(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 informaition 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, notwith-standing 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 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 underwriter 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 interests 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. (6) Abuses of the character above enumerated have been so widespread and have occurred in such number of instances 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 provided 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 [the] similar functions [of any such office].

(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.

Ç(11) The term "security holder” means each holder or owner, for the time being, of any such security.]

[(12)](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 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 equipment trust certificates or like securities are outstanding.

[(13)](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.

[(14)](13) The term "State” means any State of the United States.

[115)](14) The term “Commission” means the Securities and Exchange Commission.

[(16)](15) The term "voting security” means a security presently entitling the holder or owner thereof to vote for the election of directors.

[(17)](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 [section 4] this Act shall not apply to any of the following [classes of] securities:

(1) Any security other than a note, bond, debenture or evidence of indebtedness, whether or not secured, [or] and other than a certificate of interest or participation in, 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, 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.

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