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TO AMEND THE SECURITIES ACT OF 1933
TUESDAY, JULY 20, 1937
HOUSE OF REPRESENTATIVES,
Washington, D. C. The committee met, pursuant to call, at 10 a. m., in the committee room, New House Office Building, Hon. Clarence F. Lea (chairman) presiding
The CHAIRMAN. The committee will come to order, please.
We are very glad to have with us this morning Congressman Wilcox, of Florida. He has given a study to this question involved under H. R. 6968, that enables him, I am sure, to make a practical and useful contribution to the committee. Mr. Wilcox.
STATEMENT OF HON, JAMES MARK WILCOX, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF FLORIDA
Mr. Wilcox. Mr. Chairman, I doubt if my knowledge of the particular bill and the specific provisions of the bill itself will enable me to be of a great deal of assistance to the committee in the working out of the final details; but my knowledge of the subject is largely in its broader aspect and the necessity for regulation, supervision, and control of bondholders' protective committees, so-called.
In 1935, under appointment of Congressman Sabath, who at that time was conducting an investigation into real estate reorganizations, I was designated to conduct that part of the investigation dealing with bondholders' committees, representing the holders of municipal, State, county, and other governmental bonds.
Unfortunately, the funds available for that particular work were rather limited, and my investigation was probably not as complete as it might have been, and, certainly, not as complete as I would have liked for it to have been.
I filed with the Sabath committee a complete report of the investigation which I conducted at that time, and in that report I set forth the facts as developed from those hearings.
I was greatly impressed, Mr. Chairman, with the necessity for regulation of these so-called protective committees, representing bondholders, in negotiation with governmental units which were in default, either as to the payment of principal or interest or both on their bonded indebtedness.
My investigation developed this fact, Mr. Chairman, that when a governmental unit, municipality, county, or drainage district, or what not, finds itself unable to meet its obligations, a group of bond brokers usually get together and form themselves into what they designate as a bondholder's protective committee.
They assume to represent bondholders; they are not elected by the bondholders; the bondholders do not get together themselves and select their representatives; but this thing operates in reverse order.
The representatives get together and designate themselves to represent the bondholders. Ordinarily these committees are composed of officials or representatives of the original bond houses that handled the sale of the municipal bonds in the first instance.
Customarily, they are New York, or Chicago, or Detroit bond houses. They get together in an office in New York, and they say that Pumpkin Center is about to default, or has defaulted, in the payment of its debts, and we hereby designate ourselves as a committee to represent the bondholders. They employ the lawyer who has represented the bond houses in the original issuance of the bonds. They prepare a deposit agreement under the terms of which they vest title to the bonds to be deposited with them in the committee. They give themselves unlimited power to deal on behalf of the bondholders; to institute such litigation as may occur to them as proper; to employ such assistance, such technical experts, advisers, and such lawyers and auditors and others as, in their opinion, is proper, and pay them such rates of compensation as they see fit. Usually the deposit agreement also provides that the committee itself may fix its own compensation. It may take such action as occurs to them to be proper. The agreement also contains, ordinarily, a provision that the mere deposit of the bonds is an acceptance of all of the terms of the deposit agreement. Then they run advertisements in the financial papers and they circularize their own customers to whom the bonds were sold in the first instance, and, usually, they simply advise the bondholders that a protective committee, composed of the undersigned, has been designated to represent the bondholders. They, of course, do not tell the bondholders who designated the committee. They do not disclose the fact that they designated themselves; but, ordinarily, these advertisements and notices leave the bondholder under the impression that by some court order or by election or otherwise they have been selected to represent the bondholders. The bondholder, of course, deposits his bonds with the committee. I venture the assertion that in at least 75 percent of the cases, the bondholders never see the deposit agreements. They know nothing of the contents of the agreement, or what the powers or authority of the committee itself is.
After the bondholder has deposited his bonds with the committee, then they assume to act on behalf of all of the bondholders and to institute such action as they see fit.
As I say, there is no control; there is no regulation; there is no supervision of their action. They employ whomsoever they wish, to do whatever they think is proper, and they pay such compensation as occurs to them. There is nobody to say “no”; there is nobody to supervise or to regulate their expenditures or the action which is taken by them.
Mr. ÉOLMES. Mr. Chairman, may I ask a question?
Mr. Holmes. In your studies and from your experience, how general is that applicable to the various 48 States?
Mr. Wilcox. My investigation was not carried on to the extent of going into all of the various States. I believe the committees that I investigated were principally in Florida and North Carolina, New Jersey, and Michigan.
Mr. HOLMES. I am under the impression that the Massachusetts law provides that if a municipality fails to meet its obligations, the law specifically allows the Governor of the State to appoint someone of responsibility to supervise their affairs. The State is responsible for that committee's or that municipality's action.
Mr. Wilcox. That is true in certain instances, Mr. Holmes; but I think that is by specific act in Massachusetts in each instance.
I do not know what the general State law is, but I know in the case of Fall River, Mass., that was done.
Mr. HOLMES. That is the one I am referring to.
Mr. Wilcox. There was a special committee, or State commission, appointed, and it virtually constituted a receivership.
Mr. Holmes. And they are still operating in that municipality? Mr. Wilcox. They are still operating in that municipality.
Mr. HOLMES. As I understand, they are meeting the interest on their bonds.
Mr. Wilcox. I think that Fall River is the only city that came under my observation in the past 10 years that has a statute similar to that on this general subject.
Mr. HOLMES. In my own district, we have a small township that also defaulted, and the same sort of a committee was set up to take up the matter of that town. That was handled the same way as the other one.
Mr. Wilcox. Evidently there is something in the law of the State of Massachusetts that does not exist in other States, because other States have found the Fall River plan to be inapplicable to their own situation. I know it has been studied in several of the States.
New Jersey undertook to handle it by special statute, but it was not as extensive nor as drastic as the Fail River case, and, because of their State constitution, they were not permitted to do it, in some way.
I know that the Fall River case was studied very carefully in Florida and in New Jersey, and they found that it was not possible to follow any of the features of the Fall River plan.
Mr. HOLMES. Of course, your State law probably does not permit of of that particular plan.
Mr. Wilcox. Now, the trouble with this whole situation, as I see it, is the fact that there has been no regulatory legislation.
A bondholders' committee, self-constituted, has no responsibility to anybody in the world except to itself. It is just the same as if Mr. Martin, Mr. Lea, and I should get together here in this room today and say that some city in some State that we have never been in is about to go into default in the payment of interest on its bonds, and we hereby designate ourselves as the committee to represent the bondholders in that community.
Now, it is a community that we have never seen. We have never been in it. We do not own a foot of property in it. We do not own a nickel's worth of their bonds. We have no interest whatever in it. But, we three men, here in this room, today, in Washington, decide that we will constitute ourselves a bondholders' committee for that town, and we go down and put an advertisement in the Wall Street
Journal and the Financial Chronicle and other financial newspapers, and we say that, the undersigned have been designated as a bondholders' committee to represent the bondholders of Pumpkin Center, and all bondholders are hereby requested and directed to file their bonds with the undersigned.
And we say that they are directed to get in communication with us at once, and the bondholders will send us in their bonds, and, when a bondholder does that, we send him back a little memorandum in which we will say "That we acknowledge receipt of your bonds, and, by the act of deposit of your bonds, you become bound by the deposit agreement, dated so-and-so, and filed with such-and-such a bank.”
Nobody on that bondholders' committee owns any bonds, but we vest ourselves with the full title to that man's bonds. We give ourselves the full power and the right and the authority to institute litigation against that community by mandamus action or otherwise. We give ourselves authority to employ counsel and auditors and employees; we give ourselves authority to fix our compensation and to do anything and everything else that we see fit to do.
Now, there is nobody in the world to tell us not to do it; there is nobody to regulate us or supervise us or say that we are taking unnecessary action; that we have employed too many people; that we are using the bondholder's money to pay excessive salaries, or that our own compensation is excessive or beyond what is a reasonable amount.
Now, theoretically, of course, the gentleman, the bondholder, has a remedy. That bondholder who has filed his bonds with us is the holder of a bond, we will say 9 thousand-dollar bond, and we institute action against this theoretical city that I am talking about, and we recover for him, we will say, $25, an average of $25 for all of the bondholders, and we deduct from that our proportion of the expenses, and the expenses, we will say amount to $15 for each bondholder. Theoretically, he can go into a court of equity and have an accounting with us.
He can make us disclose to the court the reasonableness of our charge, and the court would have a right-any court having jurisdiction—would have a right to pass on those things and say that we have overcharged him; but I call your attention to the fact that, while that is a theoretical remedy, as a practical matter, it is of absolutely no value to him, for the reason that he has to have an attorney to recover his portion of the $15, which was over or excessive; he has to employ counsel, and probably travel a great distance to the court, and go to all of the expense incident to the employment of counsel, and the institution and following through of the suit, probably to recover half of these fees, which, in his case, would be $7.50. So, as a practical matter, he has no remedy, though, theoretically, of course, he would have recourse to the courts of equity.
You wanted to ask a question, Mr. Mapes?
Mr. MAPES. In view of your practical experience, I would be glad to know if you think that the bill before the committee meets the situation and will remedy the evils which you have in mind?
Mr. Wilcox. I said this, in the first instance, that I doubted if my knowledge of the technical provisions of the bill will be of a great deal of help to the committee. I approve of the general plan of this bill. There are, possibly, one or two minor provisions in the bill that I think should be somewhat modified.
Mr. MAPES. Have you compared this bill with the Sabath bill?
Mr. Wilcox. No: I have not.
Mr. MAPES. Or the committee substitute to the Sabath bill which has been reported to the House?
Mr. Wilcox. As I understand the Sabath bill, it provides, or attempts to provide, for a method of regulating the representatives of bondholders in bankruptcy proceedings or in proceedings which have been instituted under 77-B, and is not sufficient to cover the regulation of bondholders' committees which represent bondholders in cases which have not actually gone to the bankruptcy courts.
Now, the iniquity of the bondholders' committee racket, as I see it, is this: It is not so much the representation of creditors before the courts in bankruptcy proceedings. When a matter goes to that point, reaches that extent, the court has all of the parties before it, and the court passes upon these various questions, and I am not concerned about that. The thing that I am concerned about-and this is the thing that I think is lacking in the law at this time-is a regulation of the committee in its dealing with the bondholders prior to the filing of proceedings under 77-B or under the new municipal bankruptcy bill, when it shall become effective again.
Mr. MAPES. I think that the introduction of this bill assumes that there are evils to be corrected and for one I am interested to know whether this bill will best meet or remedy the situation.
Mr. Wilcox. I think, to a large extent, this bill will. Now, there is just this thought in that connection, though, Mr. Mapes, that I think you ought to bear in mind, and that is, there have been some objections made to the wording of this bill by some of the representatives of municipalities, and taxing units, on the theory that the bill, in addition to the regulation of committees, would probably hamper the municipality itself in working out its own readjustment plan, insofar as the municipalities are concerned.
Now, certainly the bill should not be broad enough to interfere with or to hamper the municipality in anything for the settlement of its own debts.
In many cases, municipalities do not wait for bondholders' committees to form themselves; but they employ a fiscal agent of their own to undertake to contact their creditors and their bondholders, and to submit to them and to work out for them a debt readjustment plan.
Now, if the bill is sufficiently broad, as some of the representatives of the municipalities seem to think it is, to cover that, then, of course, the bill would be objectionable, because certainly municipalities ought not to be hampered in the free exercise of their powers as a municipality, in the free exercise of negotiations with their own creditors for the working out of their indebtedness.
Mr. MAPES. I might say that I, just this morning, have been looking over the report of the Securities and Exchange Commission as it relates to indebtedness of municipalities, and I notice that you appeared before the Commission.
Mr. Wilcox. Yes, sir.
Mr. MAPES. And you were acting at that time as the city attorney for your home city, West Palm Beach?
Mr. Wilcox. Yes, sir.