Committees in court proceedings.

Mr. WOLVERTON. Does that provision in this bill apply to bankruptcy cases?

Commissioner DOUGLAS. This would, sir; yes.

Mr. WOLVERTON. Then what is the situation? Are we, in this bill, providing for the same subject matter that is already in the Chandler bill, which recently was reported to the House, H. R. 6439, and which deals with the same subject matter?

Commissioner DOUGLAS. Well, I think, sir, there is nothing inconsistent whatsoever between that bill, as I understand it, and this one, on that point.

Mr. WOLVERTON. Well, that bill has to do with the same subject

matter.

Have you read the Chandler bill?

Commissioner DOUGLAS. I have, sir.

Mr. WOLVERTON. As reported by the committee?
Commissioner DOUGLAS. I have, sir.

Mr. WOLVERTON. And you say

Commissioner DOUGLAS (interposing). I do not believe there is a single thing in there that is inconsistent with this provision that I am now speaking about.

For example, sir, under the Chandler bill, as I read it, the Federal court would have the power to determine the fees and expenses of committees.

Under the Lea bill, the requirements of section 10 (a) (1) would be satisfied by a provision in the deposit agreement that the Federal court was the agency which would pass on the fees and expenses of the committee.

Mr. WOLVERTON. Does the Chandler bill require the fees or the compensation to be passed upon?

Commissioner DOUGLAS. I do not believe so, sir; nor does the Lea bill. The Commission would not have any such jurisdiction.

Mr. WOLVERTON. Then, what would be the effect? Would the Securities Commission have jurisdiction over that? Would your Commission have jurisdiction over the subject matter of the Chandler bill?

Commissioner DOUGLAS. Oh, no, no. This is a limited phase of it, sir. A committee comes in under this Lea bill and files a declaration, including its deposit agreement which it proposes to use in connection with 77B proceedings. It provides, pursuant to section 10 (a) (1), in the deposit agreement that the Government, that a governmental agency, is going to review its fees and expenses, and that the governmental agency that is going to review its fees and expenses is the 77B court.

All the Commission would have anything to say about under this bill would be to see that this committee did make such a provision in its deposit agreement. That is all.

But as regards the determination of fees and expenses, the Commission would not have jurisdiction.

Mr. WOLVERTON. Well, then, you would not assume any duty of protecting the security holders in that case; you would leave them to the protection of the bankruptcy courts?

Commissioner DOUGLAS. That is right, sir; that is right.

Mr. WOLVERTON. Now, just what is gained, then, by that provision to which you have referred in the so-called Lea bill?

Commissioner DOUGLAS. Oh, as respects a 77B case, I do not think there is really anything.

There was a question under the present 77B-a nice legal question, sir as to whether or not a committee that was operating in a 77B case which was denied compensation from the estate could nevertheless turn around and collect its fees and expenses out of the deposited bonds that it had in its possession; not out of the estate but from the bonds in its possession.

Mr. WOLVERTON. Would it not seem to tend to clarity at least if provision were made in this bill definitely setting forth that it does not apply to any action under 77B of the Bankruptcy Act?

Commissioner DOUGLAS. The bill applies to such cases. Section 6 and the section 10 apply. And I think section 6 and section 10 should apply.

I merely indicate that there is nothing that would interfere with the jurisdiction of the court. That is, a committee that met the requirements of the Chandler bill in this respect would meet the requirements of section 10.

Reports and accounting.

Another provision of section 10 (A) that is made the subject of a "required finding" by the Commission relates to an annual (at least an annual) report and an accounting by the committee, in such form as the Commission may require or approve, and to the filing of copies of such report and accounting with the Commission.

Committees in court proceedings.

Mr. WOLVERTON. May I just ask one or two further questions to complete what I was inquiring about?

Commissioner DOUGLAS. Yes.

Mr. WOLVERTON. Could any harm come by exclusion from this act, of those who come within, section 77B of the Bankruptcy Act? Commissioner DOUGLAS. Complete exclusion from this act? Mr. WOLVERTON. Yes.

Commissioner DOUGLAS. I think so, sir. And I think the clear illustration of that is this: You will find, as conditions have prevailed, that committees operating under 77B have conflicts of interest at times which are legion. The mere fact that they are operating under 77B does not mean that they are any better committees.

Mr. WOLVERTON. It means, however, that if they are within the provisions of 77B that they are under the protection of the court, whose consent and approval must be granted in the payment of compensation.

Commissioner DOUGLAS. Yes. Of the latter I am not so sure. Mr. WOLVERTON. I gathered from a hasty reading of the Chandler bill

Commissioner DOUGLAS (interposing). Under the Chandler bill; yes. I mean under 77B, the one that is on the statute books today, the court would have the right to determine what fees and expenses can be paid from the estate, but there is some question as to whether or not, if the court had denied compensation from the estate, the committee then could assess and collect fees and expenses from the bondholders.

Mr. WOLVERTON. It is difficult for me to understand what protection you could give to those interested in matters in litigation or being settled under bankrupt proceedings who would not have ample protection through court supervision.

Commissioner DOUGLAS. Without this bill your underwriters' committee would be properly constituted under 77B

Mr. WOLVERTON (interposing). The question is whether the subject matter is before the court for its approval. The mere presence of an underwriters' committee or the absence of such committee does not necessarily, in my opinion, determine the right of the court to protect one who is a security holder. The protection is afforded to him by the court proceedings. Where the committee has failed to take care of his rights, it seems to me, he can be given the same protection by the court as you are endeavoring to give him through the intervention of a bureau here in Washington.

Commissioner DOUGLAS. Well, they are quite two different things: What this bill would be designed to do would be to determine whether those on the committee were measuring up to the fiduciary standards of the common law and had eliminated material conflicts of interest.

Mr. WOLVERTON. You are assuming then that if the committee is actuated by ulterior motives that they could not get protection; that is, the security holders could not get protection from the court. Commissioner DOUGLAS. Well that is true, as revealed in many, many cases we have studied, including 77B cases. And it is very clear to us from that study and investigation that the court is not in the position to give the security holders the full-fledged protection which is necessary and desirable.

Mr. WOLVERTON. In other words, the bill is drawn on the theory that it would give the bureau here in Washington the right to protect the interest of individuals as against the courts?

Commissioner DOUGLAS. No.

Mr. WOLVERTON. It almost amounts to that, does it not? You say that you have abundant evidence where they have not been protected in court proceedings, and the assumption which would be drawn from your statement is that it is necessary to have legislation which would enable the bureau in Washington to do what the courts have not done.

But

Commissioner DOUGLAS. From that limited viewpoint, yes. let me clarify it to this extent: I think one of the things the report indicates is that one of the most effective ways of protecting security holders in these reorganizations is to see to it that they have representatives who are free from material conflicts of interest.

Mr. WOLVERTON. In other words, you are not willing to assume that the court itself would be vigilant enough to detect that attempt without the aid of some bureau in Washington?

Commissioner DOUGLAS. Well, I am confident that, on the basis of the experience of the last 3 years, since section 77B was inaugurated, the courts have not been vigilant in the elimination of committees with conflicts of interest.

Cost to Commission.

Mr. WOLVERTON. To what extent would it be necessary for you to increase your force in Washington to give the service which you have in mind to give by the provisions of this bill?

Commissioner DOUGLAS. That is the provision governing com

mittees?

Mr. WOLVERTON. Not only that, but providing representatives in court for the individuals whom you claim are being imposed upon. Commissioner DOUGLAS. Well, now as respects the filing of declarations by the committee and scrutinizing the declaration and making sure that there are no conflicts of interest of the kind described, the increase in the force of the Commission would not be very heavy. I do not have, Mr. Chairman, any figures on that but, I will be glad to submit to the committee, if the committee desires, an estimate of the budget requirement in case this bill were enacted."

Mr. WOLVERTON. I visualize that it will be necessary to set up a very considerable additional force of employees.

Commissioner DOUGLAS. In order to scrutinize the declarations? Mr. WOLVERTON. In addition to that it would require a roving band of lawyers to go all over the country; I cannot estimate what it would require. It seems to me it would require a tremendous addition to your present force.

Commissioner DOUGLAS. You are referring, sir, to the provision for reports by the Commission or intervention by the Commission?

Mr. WOLVERTON. I am referring to the whole scope of this bill; I am not confining it to any one section contained in the bill. It seems to me it would set up a tremendous force and require the setting up of a tremendous addition to the employees already in the Bureau, and in addition to that, as I remarked before, require a roving band of attorneys to go all over the country to represent the parties in these proceedings.

Commissioner DOUGLAS. Well as respects the quantity of work that you visualize, if it came at all, it would come under sections 13 and 14 of this bill; not under the provisions that I am discussing this moment. Mr. WOLVERTON. Well, I beg your pardon; I have broadened my observation beyond what you have referred to at the moment. Commissioner DOUGLAS. Yes.

Mr. WOLVERTON. But I think we should have some estimate covering that.

Commissioner DOUGLAS. We would be happy to submit to your committee a budgetary estimate; and on the basis of the 77B cases, for the year 1936 I can speak with considerable confidence when I say that the additional load would not be terrific. But we can give you a budgetary estimate.

Mr. WOLVERTON. I think that would be helpful, Mr. Chairman. The CHAIRMAN. Very well.

Mr. WOLVERTON. Will you make it broad enough to include all the work required for carrying the provisions of the bill into effect, not merely limiting it to the sections that you have been discussing this

morning.

Commissioner DOUGLAS. Yes.

The CHAIRMAN. Can you do that for us, Commissioner?
Commissioner DOUGLAS. Yes.

The CHAIRMAN. Very well.

Profiting from the trust.

Commissioner DOUGLAS. Coming back now to section 10 (a) (3): A further finding of the Commission would be that the proxy or deposit agreement to be used by the committee contained a provision

or covenant on the part of the committee not to buy or sell securitiesnot to trade in the securities. That appears at the beginning of line 4 on page 36.

A further provision in that same section on page 36 provides against the committee becoming pecuniarly interested, directly or indirectly, in any contracts, arrangements, or undertaking with the issuer or with any successor company with respect to any matters whatsoever except exchanges or subscriptions under the plan (other than underwritings) or participation in the management of the continuing or new company.

One of the prevailing practices that committees have engaged in has been just the reverse of this. Committees in reorganization have almost invariably provided in the deposit agreement that they could trade in the securities; that they could become pecuniarily interested in the property. This bill would require them not only to take those provisions out and so to restore the common law, but by covenant to provide against trading in securities or against becoming interested in the property. One of the witnesses a few weeks ago before your committee was talking about a reorganization of some company in New York in which he was interested, in which the reorganization committee was composed of representatives of bankers who made $750,000 underwriting the new securities under the plan. Under this bill that procedure would no longer be possible. The committee could not go to its affiliates and give it the underwriting. The committee would have to shop around to get the best offers; it could not distribute that patronage to its own affiliates. The consequence should be arm's length bargaining with the result that better bargains would be made for the investors. That would follow since the committee would no longer be interested in obtaining that profit for itself.

Termination of proxies and deposits.

One of

Other provisions under section 10 (a) (4) relate to the termination of the authority given by the proxies, deposits or assents. them, at the top of page 37, relates to the event of a declaration ceasing to be effective. Once a declaration ceases to be effective as a result of a stop order, then the proxies and deposits which have been collected shall be terminated unless the Commission otherwise provides.

We have had some experiences under the statute, which is at present being administered, and they have been very troublesome. Committees have perhaps violated the statute, but they retain the deposits which they have on hand. This provision of the bill would make it possible for the Commission, in necessitous cases, to say that the proxies and deposits which were obtained after a certain date shall be null and void. In other words, the provision would prevent the committee from keeping or getting the benefits of its activities which were fraudulent or in violation of the statute.

Another provision of section 10 (a) (4), line 7, page 37, requires that proxies or deposits in respect of the support, adoption, approval, or disapproval of a plan, shall be terminated by the committee if the court, official, or agency has rescinded its approval of the plan; or if such plan has been amended in a way which is material, then the proxies or deposits shall become null and void and have to be resolicited.