Trustees Reformed?

Often heard in fireside fulminations is the charge that the New Deal is deliberately and cunningly undermining the property rights of U. S. citizens. Last week a prime New Deal agency asked Congress for broad legislation not to weaken property rights but to strengthen them. The reform proposals were contained in another Securities & Exchange Commission report based upon Commissioner William Orville Douglas' diligent investigation of protective committees and reorganizations (TIME, May 18). Mr. Douglas concluded that U. S. investors had suffered woefully from irresponsible corporate trustees, legal representatives of scattered and inarticulate bondholders.*

A corporate trustee is usually the trust department of a bank. It is the trustee who holds the mortgage securing the bonds, who forecloses if the borrower de faults. As pointed out in the SEC report, "The trustee is the only agency avowedly designed for the protection of security holders during the entire life of the security." Commenting on his findings last week, young Commissioner Douglas declared: "By & large, the corporate trustee has been sitting idly by while bondholders have been exploited. . . . And when I speak of the corporate trustees, I am speaking about some of the leading banks of the country, some of which served their proprietary interests in an issuing com pany before fiduciary interests were served."

What SEC wants is to jack up the standards of corporate trusteeship to the high level of personal trusteeship, the responsibilities of which have been clearly defined through centuries of court decisions. In law a personal trustee is supposed to act like a mythical character called the "prudent man." That implies active defense of the beneficiaries' interests and a definite liability for losses through negligence. But the combined skill of lawyers representing the borrower, the banker and the trustee (but never the investor) have reduced the duties of corporate trusteeship to a few clerical motions, the liabilities to virtually nothing. Moreover, SEC found that "subtle influences of friendship and business relations" tended to make the trustee "a timid and ineffectual representative of security holders."

In countless cases Commissioner Douglas discovered that the bank-trustee was affiliated with the underwriting house which marketed the bonds; that the borrower was represented on the board of the bank-trustee; or that the bank-trustee was also a creditor whose claims conflicted with those of the bondholders. The report suggested that "if the prestige and good repute of our large commercial banks are to be maintained," they might have to divorce their corporate trust departments just as they had divorced their securities affiliates in the early days of the New Deal.

That was not a definite recommendation, however. SEC's proposals centred on the indenture, urging such elementary requirements as liability for failure to record mortgages, notify bondholders of defaults or prevent illegal substitutions of collateral. By setting higher legal standards for trustees and forbidding exculpatory (hedge) clauses in indentures, SEC hopes to evolve vigorous, alert agencies, per-haps paid more than trustees now receive, but whose sole purpose would be protection of security owners.

*To Congress last week SEC also sent its long-awaited, highly-involved study of thebroker-dealer, plumping for segregation of the two functions. Requesting no new legislation, SEC announced that its first step would be to offer floor members of stock exchanges the choice of being either straight brokers or traders for their own accounts. Exceptions will be made for specialists and odd-lotdealers.

--To Congress last week SEC also sent its long-awaited, highly-involved study of the broker-dealer, plumping for segregation of the two functions. Requesting no new legislation, SEC announced that its first step would be to offer floor members of stock exchanges the choice of being either straight brokers or traders for their own accounts. Exceptions will be made for specialists and odd-lot dealers.

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