Commissioner DOUGLAS. Yes; but there are two things that I am not so certain about in your case: The first and most important is this: First, is this a default situation?

Mr. WOLVERTON. Well, the cases of refinancing, all that I have had any knowledge of, were cases where there were defaults. Commissioner DOUGLAS. That may be.

Mr. WOLVERTON. Although at times it may involve bond issues that are not in default, where it was necessary to give consideration to all interests as part of a reorganization process.

Commissioner Douglas. Yes.

Mr. WOLVERTON. But it originates, of course, in some form of default.

Commissioner DOUGLAS. Yes, and in that situation that would be a municipal debt arrangement, as I understand it, as defined in this bill on page 8, section 2(91), which is [reading]:

any modification of the terms, priorities, rights, or privileges of any security issued or guaranteed by any political subdivision of a State or Territory of the United States, or by any public instrumentality of one or more States or Territories; or any exchange of any such security in whole or in part for any other security or securities and/or other property, other than an exchange exclusively for cash; or the assertion of any rights evidenced by any such security.

Mr. WOLVERTON. Do you think it a good policy for the Federal Government to assume that kind of jurisdiction over a municipality; and do you think it has the legal right to do so?

Commissioner DOUGLAS. Well, as I explained it to the committee the other day I do not believe you were here at the time--the provisions on page 16, section 3 (a) (8), follow the line, the general line, laid down by the Supreme Court of the United States in connection with the tax cases, where the Supreme Court said or held, I believe, that the Federal Government could tax, as income, salaries of those people who were independent contractors of municipalities.

Mr. WOLVERTON. Yes; and that has raised many, many cases; many cases have been brought before the Supreme Court to determine what is an "independent contractor".

Commissioner DOUGLAS. That is true.

Mr. WOLVERTON. It is your thought then that this provision should, conform with what you consider to be the Supreme Court's decision. Commissioner DOUGLAS. Yes.

Mr. WOLVERTON. You are not willing to say that that section is in accord with the policy that this committee and the Congress adopted in the enactment of the Securities Act?

Commissioner DOUGLAS. That is quite right, sir. Under the Securities Act the municipality need not register nor need a committee that is formed to represent securities of a municipality.

Mr. WOLVERTON. I remember when the Securities Act was before this committee there was considerable discussion on the question as to whether municipal securities should be included in the provisions of that act.

Commissioner DOUGLAS. Yes.

Mr. WOLVERTON. This committee decided, as a matter of policy, that municipal securities should not be included and that policy was approved by Congress.

Commissioner DOUGLAS. That is correct; and we are back here with experience in the administration of that act and the events that have transpired since the enactment of that act. The Commission is back

to you gentlemen recommending that municipal protective committees no longer be allowed to stand under the umbrella of the Securities Act exemption.

Mr. WOLVERTON. Are you asking that Congress amend the original Securities Act?

Commissioner DOUGLAS. What we are asking is this: There is no reason why municipal protective committees should be treated any differently than any other committee; no reason why they should be given exemption similar to that of the Securities Act.

Mr. WOLVERTON. The point I am making is this: In the drawing of this section which you have referred to on page 16 due regard has been given to the Supreme Court's decision that would amount to eliminating municipalities from the supervision which you are seeking to impress by this bill.

Commissioner DOUGLAS. That is correct.

Mr. WOLVERTON. But when you by specific language state that the exemption shall not apply to independent contractors employed by municipalities you are then, in my opinion, indirectly impressing that supervision on the municipality just as effectively as if you had not exempted them in the first part of the section.

4

Commissioner DOUGLAS. Well, now just to get this matter clarified. There are two phases of this. First: This does not affect one iota, as I read the bill, municipal financing or refinancing; but it affects those situations, those default situations, that is, those situations where there is an attempt being made to refinance by modifying outstanding securities which are defined as municipal debt arrangements under the Lea bill. Those default situations do not embrace the normal case of municipal refinancing.

Mr. WOLVERTON. Very weil. Assume that it only applies to a case of default.

Commissioner DOUGLAS. That is right.

Mr. WOLVERTON. That constitutes most of the cases.

Commissioner DOUGLAS. Not most of the cases of municipal bond issues; no.

Mr. WOLVERTON. Not bond issues, but reorganization and refinancing.

Commissioner DOUGLAS. Yes, as defined in the bill. The second point is this: That when that control does come in under this bill it affects only that particular person who as an independent contractor or otherwise is soliciting proxies or deposits from security holders. Mr. WOLVERTON. That is where the Bureau gets its finger in the municipal pie.

Commissioner DOUGLAS. It gets its finger in the municipal pie to this extent: That those persons who do solicit proxies or deposits from the bondholders, who are in a fiduciary position as respects the bondholders, must live up to the standards of this bill.

Mr. WOLVERTON. I am not willing to concede that the reason that impels you to ask for this supervision in corporate affairs also exists as to municipal affairs; the bill provides that the municipality has no right to select an independent contractor except as he comes under the provisions of this bill.

Commissioner DOUGLAS. It only means that the man who enters into a fiduciary position as respects the bondholders in these reorganization situations, whether it be a committee, an independent

contractor, or whatever you standards set for a fiduciary. Mr. WOLVERTON. In other words, you mean that a bureau here in Washington would be better able to say whether an independent contractor was capable of giving honest service to the municipality that employed him?

want to call it, must live up to the That is what it means.

Commissioner DOUGLAS. Well, I say this: That the interests between the debtor and the creditor are just as conflicting in the municipal situation as in the corporate situation.

Mr. WOLVERTON. Would you put the municipality in the same category as those who have mismanaged a corporation's affairs so as to require reorganization?

Commissioner DOUGLAS. May I say I do not know-but I would say this: There is one common element running through these reorganizations; we have the creditor interests that want their pound of flesh; and on the other hand we have the debtor interests that want to get the debts reduced just as much as possible, the interest and the principal cut down as much as possible. I say that the corporate and municipal situations are very nearly analogous. Mr. WOLVERTON. As to conflicting interests? Commissioner DOUGLAS. Yes.

Mr. WOLVERTON. The reasons that you have developed in connection with this language and the experience you have had does not seem to me to apply to municipal authorities and they should not be placed in the same category as those who are interested in corporate affairs. Public officials should be assumed to have a responsibility to the people and the people are able to observe whether they are fulfilling that responsibility. I cannot see any reason for assuming that the municipal authorities would not exercise their duties just as honestly in the matter of reorganization or refinancing as they would in other municipal activities. The selection of an independent contractor for this purpose is just as much a part of their duties as the selection of a contractor to do ordinary or usual work for the municipality. Why should the independent contractor selected to assist a city in refinancing be subject to supervision here in Washington anymore than any other individual contractor to do certain types of work for the city should be subject to supervision in Washington.

Commissioner DOUGLAS. Well, I would agree with the latter statement. But do you not think there is a basic difference when the individuals or the independent contractors who are selected to act as a protective committee, are representative not only of the municipality but of bondholders all over the country?

Mr. WOLVERTON. The basic objection, in my opinion, to that section is this: You recognize at the commencement of the section the limitation of the constitutional right to effect municipalities and yet by bringing in the provision relating to independent contractors you practically accomplish the same purposes as if there was no exemption of municipalities as provided in the section.

Commissioner DOUGLAS. Well, insofar as that goes, would not that lead to an exemption of the municipal protective committee? Insofar as the independent contractors of the municipality are acting in a fiduciary capacity as respects bondholders, they should not be exempted any more than there is reason for exempting committees. There is

no reason to exempt those who are not regular employees of the municipality where those persons are representing bondholders as well as the municipality. As respects the exemption of regular employees, the bill follows the rulings of the Supreme Court in the

tax cases.

Mr. MALONEY (acting chairman). Have you finished?

Mr. WOLVERTON. Yes.

Mr. MALONEY (acting chairman). The committee will stand adjourned until 10 o'clock tomorrow morning.

(Thereupon at 12 noon an adjournament was taken until 10 a. m. of the following day, Wednesday, July 14, 1937.)