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SECURITIES AND EXCHANGE COMMISSION

REPORT ON THE STUDY AND INVESTIGATION OF THE WORK, ACTIVITIES, PERSONNEL, AND FUNCTIONS OF PROTECTIVE

AND REORGANIZATION COMMITTEES

TRUSTEES UNDER INDENTURES

SECTION I

INTRODUCTION

We have included the indenture trustee in our study and investigation of the work, activities, personnel and functions of protective and reorganization committees pursuant to Section 211 of the Securities Exchange Act of 1934, for several reasons. In the first place, the trustee (which normally is a commercial bank)' holds title to the property which is conveyed by the issuer as security for its bonds, debentures or notes. The indenture under which the security is held and pursuant to which the bonds, debentures or notes are issued commonly vests in the trustee broad discretionary powers which it may exercise for the protection of the beneficiaries of this trust. Throughout the life of the trust many occasions will arise for exercise of these powers. Commonly these occasions will increase in frequency as the period of reorganization draws near or arrives. In considering, then, the problem of designing a reorganization system which will afford to investors maximum protection against exploitation at the hands of the reorganizing group, a study of the functions which the trustee in the past has performed and of the functions which it might properly perform becomes of paramount importance.

In the second place, the trustee has a direct and intimate bearing on the functioning of and occasion for protective committees. As We develop herein, trust indentures almost universally provide that the security holders can force the trustee to take specified action, such as foreclosure, only if a designated percentage of them makes demand on the trustee (with adequate tender of funds to indemnify the trustee) and the trustee refuses to act. Furthermore, these indentures frequently provide that the security holders themselves can take certain action, such as suing on the securities, only if a designated percentage makes demand on the trustee (with similar tender of indemnity) and the trustee refuses to act. Hence in case of bonds, debentures, notes or similar securities, formation of a protective committee may be necessary in order to obtain the necessary amount of the securities to make such demands on the trustee and thus mature the right of these security holders themselves to proceed or to force the trustee to do so. The relevancy of a study of the trustee to a study of protective and reorganization committees is thus apparer

1 "Generally, the earliest mortgages ran to a single individual as trustee, although in the case of the New York and Erie Railroad Company from the beginning there were two or more individual trustees, Subsequently it became the general practice to name two or three individuals as trustees. Still later, the individual trustee was superseded customarily by a corporate trustee, and in recent years, to meet the requirements of State statutes calling for a resident trustee, a natural person and citizen of the State oftentimes is joined with a corporate trustee to which, however, is assigned exclusively al active duties prior to default.” Stetson et al., Some Legal Phases of Corporate Finance, Reorganization and Regulation (1927), at 11. The use of individual trustees (usually employees, officers, or directors of the houses of issue) in the real estate bond field is described in our report on Committees for the Holders of Real Estate Bonds (1936). Sec. II at 12-13. The extent to which commercial banks act as trustee is described infra, at 99.

Our study of the trustee paralleled our study of protective and reorganization committees. In the reorganizations which we investigated and presented at public hearings the activities of the trustee were explored. Trust officers and their counsel were examined, both as respects their relation to the various committees and as regards their action or non-action prior to and after default. A questionnaire was prepared and sent to 53 leading corporate trustees throughout the country, these being chosen at random with due regard to geographical distribution. This questionnaire is included as Appendix A to this report. 424 returns from this questionnaire were received. The results have been incorporated in this report. Furthermore, we have drawn to some extent from reports and investigations of other governmental agencies, from decisions of the courts, and from other sources' for illustrative material bearing on the problem of the necessary and proper functions of the trustee both before and after default.

The current interest in this field is attested by the fact that special committees of the American Bankers Association and of the Investment Bankers Association have recently been appointed to study the problems of the trustees and investors under these indentures.

Under modern trust indentures securing issues of corporate bonds, debentures and notes, important powers are vested in the trustee. The security holders themselves are generally widely scattered and their individual interest in the issue is likely to be small. The trustee, on the other hand, is usually a single bank. By virtue of the broad discretionary powers vested in it under the typical trust indenture it is in a position to take immediate action in a variety of ways to protect or enforce the security underlying the bonds, de

A selected bibliography of such sources is set forth in Appendix G to this report.

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