Such legislation should be part of an integrated legislative program dealing with all phases of the reorganization problem. It should be aimed at refashioning the trust indenture in light of the objectives which have been discussed. As in case of the Securities Act of 1933, the point of control should be the public offering of securities. Such legislation should provide for the setting of minimum standards for indentures under which securities are issued and publicly offered and qualifications for those undertaking to act as trustees for such security issues. It should forbid the use of the mails or any means or instruments of transportation or communication in interstate commerce for the sale of securities issued under indentures, unless these indentures and the trustees thereunder meet the prescribed standards. The protection of investors will require not only that conflicts of interest of trustees be eliminated but also that some safeguards against impecunious and irresponsible trustees be established. This is essential lest the safety of funds be jeopardized and the administration of these vast trusteeships fall into irresponsible hands. Towards that end provisions should be made that the trustee should be a bank or trust company, organized under state or federal laws, with resources commensurate with the responsibilities of the proposed trusteeship. Furthermore, such standards should be sufficiently broad as to prescribe the requirements for the fiscal or paying agent under these indentures. We have pointed out in our report on Committees for the Holders of Real Estate Bonds certain critical conditions arising out of these fiscal or paying agencies. We noted there the reckless manner in which the funds were used or invested; the way in which control of the fiscal or paying agency by mortgagor and house of issue led to concealment of defaults; the method by which the earnings from these funds were retained by the fiscal or paying agent rather than credited to the bondholders or the mortgagor, as the case might be. Consequently we conclude that the fiscal or paying agency should be divorced from the mortgagor and house of issue and either be placed under the control of the trustee or in the hands of a wholly independent and responsible bank which is under a duty to notify the trustee of defaults. Furthermore, the fiscal or paying agency funds should be guarded with the same care as trust funds and be invested pursuant to the same standards. Earnings from these funds should not accrue to the fiscal or paying agent; his compensation should be fixed pursuant to the worth of his services. a declaration concerning such issuance or sale and prescribes conditions precedent to such declaration becoming effective. In subsection (d) it provides that if such conditions precedent are satisfied the Commission shall permit the declaration "to become effective unless the Commission finds that * (6) the terms and conditions of the issue or sale of the security are detrimental to the public interest or the interests of investors or consumers." Certain exemptions from such regulation doubtless can be provided where the character or amount of such security issues are not of true national concern. Further, it may be advisable to vest in the Commission power to provide for exemption of other classes of securities where in light of the small amount of the holdings, the absence of broad distribution, or the short maturity of the obligation it would not be necessary in the public interest or for the protection of investors to require these higher standards of trusteeship. Other parts of the integrated legislative program in the reorganization field which we will submit can be made to buttress such legislation. Thus, Federal courts or administrative agencies in passing on the fairness of the plans of reorganization can be required to examine the indentures under which any new securities are to be issued to ascertain that they comply with these new standards. Such measures would go far towards curbing the exploitation of investors which has occurred either at the hands of the trustee itself or at the hands of the reorganization and management groups with the knowledge, consent, or acquiescence of a complacent and inactive trustee. The result would be that investors would have an active guardian of their interests throughout the entire life of the security. There would be carried over into the corporate field the standards of fiduciary relationships which have long obtained in personal trusts and with which these professional trustees have had a long and rich experience. In view of the history of exploitation of investors under present trust indentures any less rigid requirement would be inadequate. There can be no permanency of integrity and confidence in this field unless those in control of other people's investments are held to high fiduciary standards of conduct. APPENDIX A CORPORATE TRUSTEE QUESTIONNAIRE AND TABULATION OF DATA The following questionnaire was forwarded by this Commission to a number of banks and trust companies serving as corporate trustees: PROTECTIVE COMMITTEE STUDY CORPORATE TRUSTEE QUESTIONNAIRE 1. The answers to the following questions should be submitted in duplicate and signed in the name of the trustee by a duly authorized officer. 2. This questionnaire is to be answered separately for each indenture securing bonds, notes, debentures, or similar securities of any issuer (except foreign and domestic governments or subdivisions thereof), publicly offered to an amount of $500,000 or more (but not equipment trust obligations); under which the trustee has acted and a default in principal, interest or sinking fund payments has occurred to the knowledge of the trustee since January 1, 1930, said default not having been cured by performance of the covenant as specified in the indenture; and which indenture has not been discharged of record or otherwise cancelled, released or satisfied. 3. This questionnaire should be answered on plain white paper, similar in size to this form, typewritten, with at least a two inch left-hand margin and submitted unbound except by clips and removable staples. 4. This questionnaire must be returned to the Protective Committee Study, Securities and Exchange Commission, Washington, D. C., on or before August 15, 1935. 5. If any information called for by this questionnaire cannot be supplied without an unreasonable expenditure of time or money, a detailed statement to that effect should be made together with the full reasons therefor. 6. Additional copies of this form may be had upon request to Protective Committee Study, Securities and Exchange Commission, Washington, D. C. 7. Each question concerning "affiliated interests" should be answered separately for each relevant affiliated interest, and each should be named, |