Mr. MAPES. I am interested to get your judgment as to how you thought this bill would remedy and correct the situation which now exists.

Mr. WILCOx. Well

Mr. MAPES (continuing). Because of your intimate personal knowledge and experience with the problems involved.

Mr. WILCOX. This bill is rather long and intricate and complicated. I would have liked to have seen the bill a little shorter than this, and without quite so much complication. It is a simple undertaking to regulate the activities of committees, and I think it is a very simple matter. I think that all that you have got to provide is that the bondholders' committees shall be subject to the supervision of the Securities and Exchange Commission in their interstate transactions, and relations, and that it shall be required to submit to that Commission reports of its activities, from time to time, so that there may be a supervision, a supervisory agency to see to it that the committee actually represents the bondholders it assumes to represent.

Now, I want to be thoroughly understood

Mr. MAPES. That, of course, is one of the purposes of this bill. Mr. WILcox. I want to be understood on that phase. That is the only phase that I am interested in.

Mr. MAPES. That is the purpose of both the Sabath bill and the Lea bill.

Mr. WILCOX. Except that the Sabath bill, as I understand-I may be in error about it but, as I understand the Sabath bill-it only undertakes to assume jurisdiction at the point where 77B is invoked; when you go into the bankruptcy courts, then the Sabath bill becomes effective.

But, as I understand, the Sabath bill does not attempt to control the situation before bankruptcy.

Most of these cases never get into the bankruptcy courts. Particularly is that true with respect to municipalities and taxing units. They are practically all adjusted without resort to the bankruptcy

courts.

Now, the Congress passed the Municipality Bankruptcy Act in 1934. It stayed on the statute books until last year, when the Supreme Court upset it.

We have reenacted it in the House, now, but, during the 2 years that it was in effect, it is my understanding that only 14 cases were actually filed in the courts of the country, and that there were some 750 cases of readjustments under that act, but they never actually reached the courts and, of the 14 that were filed in the courts, only 3 or 4 of them went to the point of a final decree, because, after they got into the courts, the minority creditors found that the majority creditors had an effective remedy for adjustments, and they gave in, accepted what was for their own best interests, and adjusted the matter.

But, these bondholders' committees, the iniquity of their activities is not after the case gets into the courts. Once the 77-B is invoked in a commercial case, and once the Municipality Bankruptcy Act is invoked in a municipal case, then the matter is before the court, and the court has jurisdiction there to investigate the activities of the committee and to see to it that they do properly represent the bondholders, but the iniquity of the thing is long before that; that is, when they form themselves into these self-constituted, self-appointed

committees and assume to represent the bondholders, over weeks and months and years of negotiations with the municipality or with the tax district, and, during that period, when they are collecting thousands and thousands of dollars of tax money, out of these municipalities, supposedly for the bondholders, that is the point where they permit themselves to deduct excessive fees for their own services and to employ counsel at excessive fees and charges, and they do not actually represent the bondholders and they do not actually negotiate for a financial adjustment, because, when they do deal so, they wreck their own gravy train. Now, I know of cases, for example, of municipalities where negotiations have been going on for 10 and 12 years. Every year these bondholders' committees will come down before the city commission or the town council and say, "Now, you are in deafult, and you owe so many thousands of dollars. How much are you going to be able to pay, and how much tax levy can you make for us this year?" And they will agree with the city commission that they should levy 30 mills for debt service this year; but, before the levy is made, they go to the courts for mandamus action to force the city to do what the city has already agreed to do. Now, why is that done? The answer is very obvious. They cannot charge their bondholders a fee unless they should take some action in order to force something to be done. If it is done by agreement, they could not, they would not be able to charge attorneys' fees, they would not be able to charge the committee's fees, and all of the other great fees charged. So, the thing goes along from year to year, year in and year out, with no serious effort at arriving at an adjustment, and that is the period where there ought to be an agency to regulate and control and supervise their activities and see to it that a proper accounting is made for the money received and that excessive fees are not charged, and that the interests of their own clients are actually conserved and preserved, and that is the period that I am interested in.

Now, the Sabath bill, as I understand it, undertakes to simply take care of the situation at the moment when 77-B is invoked, or, later, when we repass the Municipality Bankruptcy Act, when that act is invoked, and the parties are all before the court.

Mr. WOLVERTON. Mr. Chairman, may I ask a question?
The CHAIRMAN. Mr. Wolverton.

Mr. WILCOXx. Yes; Mr. Wolverton.

Mr. WOLVERTON. Before you pass from the subject of municipal refinancing, may I ask whether it is your opinion that there should be the same restriction applied in this bill to the municipality which employs a financial agent to assist it in refinancing as would apply to corporations in general?

Mr. WILCOX. No, sir. I made that statement just before you came in.

This bill should leave the municipality free and unhampered in the negotiation of its own adjustment.

Mr. WOLVERTON. In that connection, may I direct your attention to paragraph (8) on page 16 and ask you to notice that, while there is an exemption granted to the municipality, yet, using the words of the bill

this exemption shall not apply to any such solicitation by a person who occupies the position of independent contractor with respect to, or agent not in the regular employ of, such issuer or guarantor.

Mr. WILCOX. Now, that section was called to my attention by someone representing drainage districts, and it was-I had that section marked here on the bill as being one of the sections that was objected to by the representatives of the taxing units.

Now, whether or not it actually does impose a hardship upon municipalities, I am not prepared to say, according to the exact wording of the section; but I think that it ought to be made perfectly plain that a municipality should be free to use its own agencies and its own counsel, its own representatives, in negotiating for adjustment. Now, let me give you an example that I have in mind from my own experience.

For several years I represented the little town that I live in, West Palm Beach, Fla., and we have been held up as probably the horrible example of the country in the matter of defaults.

For several years we carried on negotiations in an effort to arrive at an adjustment of our debts. As city attorney for that community, I represented the city in negotiating with the bondholders in an effort to arrive at an adjustment. The city employed people to assist me, as the city attorney, in working out these things.

Now, I do not want to see anything in this act that would hamper that sort of negotiations, representation of the municipality; just so that it is bona-fide representation.

Now, on the other hand, I see that there is always the chance that there may be circumlocution. Now, suppose that a bondholders' committee had formed itself in New York, and they were negotiating with the municipality of West Palm Beach and they wanted to avoid any responsibility or any reports to the governmental agency set-up here. It might not be a difficult thing for them to go down and sav to the city commission: "Now, if you will simply pass a little resolution designating us as your representatives, also, we can do you lots more good and we can avoid a lot of difficulties with the Communications Commission"; and they might circumvent the act in that way; but, where it is actually a bona-fide representative of the municipality or taxing district, they should be absolutely free of any restraint, because they are simply negotiating on behalf of themselves.

Mr. WOLVERTON. Well, it seems to me that we should assume good faith on the part of municipal authorities in their efforts to refinance their financial obligations for the municipality which they represent. Mr. WILCOX. Absolutely.

Mr. WOLVERTON. While it may be true, as you have stated, that there would be some round-about way, if they desired to carry out the desires of some interested parties, yet, if they do that, you have got to assume that they are unfaithful to the trust that they have been selected to perform.

Now, what I would have in mind is this: It is a very common practice in our State for municipalities, when they are in financial difficulty, to employ some financial agent, who may be a broker, or he may be an outstanding financial expert in some way, to represent them in bringing about a readjustment of their obligations.

Now, it would seem to me that a municipality should be left entirely free to do that very thing.

Mr. WILCOX. Undoubtedly.

Mr. WOLVERTON. But, under the provisions of this paragraph (8), to which I have directed your attention, it would seem to me, not only from my reading of it, but also from the explanation that was given

of it by Mr. Douglas a few days ago, that while a municipality is exempt, as required by the decisions of the Supreme Court, yet that language to which I have directed your attention, commencing in line 16, and concluding in line 19, does not exempt the independent contractors, and, insofar as it actually applies to independent contractors, it indirectly applies to the municipalities.

For that reason, it seems to me to be objectionable.

Mr. WILCOX. I think this, that the language employed in lines 16 through 19 is possibly subject to the objection that you have made. I think I know what Mr. Douglas had in mind. I have discussed this matter with him on a good many occasions. I am in thorough sympathy with the objective that he has in mind; but I think possibly that language can be rearranged so as to avoid the difficulty that you have in mind.

Undoubtedly, the city, the municipality, must be free to employ its own representatives to represent the municipality in these negotiations.

Now, it would be improper, under those circumstances, for the city employee to also represent the bondholders. Now, this bill is designed, as I read it, to regulate those committees or those agencies which set themselves up to represent bondholders.

Now, certainly, a man cannot represent the bondholders and the city in the negotiation. This language, possibly, would regulate the man representing the city, and, if it does regulate that man, who is representing the city, it ought to be taken out, because the city should be free to employ whom it wishes in these negotiations.

Mr. MARTIN. May I ask you a question in that connection?
Mr. WILCOX. Yes, sir.

Mr. MARTIN. Do you mean that this person employed to represent the city might be considered to be an independent contractor under the language pointed out by Mr. Wolverton?

Mr. WILCOX. Let us read the language, Mr. Martin, and see what it does mean. It grants an exemption.

Mr. MARTIN. Yes.

Mr. WILCOX (reading):

A solicitation in respect of any security issued or guaranteed by any political subdivision of a State or Territory, or by any public instrumentality of one or more States or Territories, where such solicitation is made by such issuer or guarantor, or in its name and on its behalf by an employee of an issuer or guarantor, but this exception shall not apply to any such solicitation by a person who occupies the position of independent contractor with respect to, or agent not in the regular employ of, such issuer or guarantor.

All right. Now, that exempts all solicitations made on behalf of the municipality and in its name by an employee of the municipality. Now, here is the language which was objected to

but this exemption shall not apply to any such solicitation by a person who occupies the position of independent contractor with respect to, or agent not in the regular employ of, such issuer or guarantor.

In other words, as I read that language, since it has been called to my attention, it would not exempt a person who had been employed specifically to represent the municipality in negotiating for an adjustment. If the regular city attorney, or the regular city manager, or the regular tax collector from the city, should go out and negotiate, then they would be exempted from the provisions of the act; but if the city of West Palm Beach should employ me to represent it-I not now being in its employ-I would be subject to regulation.

I think that probably accomplishes more than was intended, either by Mr. Douglas or the others who have been interested in this subject. Mr. REECE. May I ask a question?

Would that apply to you in the case suggested, unless you were also acting as an independent contractor, and sought to represent the bondholders?

Mr. WILCOX. That is what I am afraid it does do. I am afraid that it would, because it simply says:

this exemption shall not apply to any such solicitation by a person who occupies the position of independent contractor with respect to, or agent not in the regular employ of, such issuer or guarantor.

I am afraid that would cover the negotiations of everybody who might assume to represent the municipality, except those regularly in the employ of the municipality.

Mr. REECE. Mr. Douglas, as I recall his testimony, did not so construe the language.

Mr. WILCOX. I think the language in this section ought to be bolstered a little bit, to make it perfectly clear that that is not the intent. I do not think that was Mr. Douglas' intention, because I think that I know what he had in mind in the whole bill.

The CHAIRMAN. Mr. Martin, had you concluded your questions? Mr. MARTIN. No.

I do not believe that the term "independent contractor" was defined to any considerable extent by Mr. Douglas. I gather that the term "independent contractor", as it applies to a municipality or a corporation, is one who is carrying on dealings with the municipality.

Mr. WILCOX. Well, I am afraid that that will affect those employed.

Mr. MARTIN. Of course, a great deal of the municipalities' activities are carried on through independent contractors. They contract to build streets and bridges, and furnish supplies, and everything of that character, and perhaps it might mean such persons or corporations as are doing that work.

Mr. WILCOX. I am sure Mr. Douglas has never intended to place those people who were bona fide employees of a municipality, employed by the municipality to represent it under the provisions of this act, but I am afraid that this language would accomplish that. Mr. MAPES. Mr. Chairman.

The CHAIRMAN. Are you through, Mr. Martin?

Mr. MARTIN. Yes.

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. In looking over the report of the Securities Commission this morning I discovered that Elizabeth, N. J., was mentioned as being a horrible example in resisting any refinancing plan.

I am not sure whether it was the regular city attorney, or a special attorney who was employed by the city, but the report states that he resisted all claims for refunding, and quoted him as saying that the city was justified in resorting to the first law of nature. As a result, according to the report, the bondholders eventually settled for about 50 cents on the dollar, much less than would have been obtained if a friendly attitude or a sympathetic attitude had been adopted by the city authorities.

Is it your position that you think that the Commission should have no regulatory power over a proceeding of that kind?