15 U.S.C. § 77bbb — Necessity for regulation

submitted 93 years ago by ch. 38 to r/title-15-COMMERCE-AND-TRADE · 670 words · no verdicts yet

in plain englishAI-generated · not legal advice

This law explains why the government must regulate trust indentures for bonds and similar securities sold to the public. Without a proper trustee, investors cannot easily protect their own rights. The law states that its purpose is to fix these unfair practices.

(a) Practices adversely affecting public Based on facts from SEC reports to Congress and other sources, this law declares that the public and investors in notes, bonds, debentures, and similar securities offered to the public are hurt when: (1) The company that owes the debt (the "obligor") fails to provide a trustee to protect investors' rights -- even though investors acting alone find it too expensive to protect their own rights, and investors acting together are hampered because they are scattered across many states and usually cannot get each other's names and addresses. (2) The trustee does not have adequate rights, powers, duties, or responsibilities to protect investors. Even though investors reasonably assume the trustee has a duty to act to protect them, trust agreements often say the trustee owes no duty to act -- even after a default -- unless investors holding a large percentage of the outstanding securities give notice of default, demand action, and provide indemnity. These agreements also often relieve the trustee of liability even for its own negligent actions or failures to act. (3) The trustee does not have resources matching its responsibilities, or has a relationship, connection, or financial interest tied to the obligor or an underwriter that creates a real conflict with investors' interests. (4) The obligor is not required to give the trustee, or investors, adequate current information about its financial condition or whether it is meeting its obligations -- or that information cannot reach investors because the trustee and investors generally cannot get each other's names and addresses. (5) The indenture contains misleading or deceptive provisions, or investors are not given full and fair disclosure of what important indenture provisions actually mean. (6) Because obligors or underwriters usually prepare trust indentures before the public offering, investors cannot take part in writing them -- and because they do not fully understand the situation, investors usually cannot get these defects fixed afterward either. (b) Declaration of policy Practices like these have happened often enough that, without regulation, publicly offering notes, bonds, debentures, and similar securities through interstate transportation, communication, or the mail is injurious to the capital markets, to investors, and to the general public. This law's policy -- which guides how every provision of this subchapter should be interpreted -- is to address these problems and eliminate the practices described above.

the actual law source: uscode.house.gov ↗public domain

(a) Practices adversely affecting public

Upon the basis of facts disclosed by the reports of the Securities and Exchange Commission made to the Congress pursuant to section 78jj of this title and otherwise disclosed and ascertained, it is hereby declared that the national public interest and the interest of investors in notes, bonds, debentures, evidences of indebtedness, and certificates of interest or participation therein, which are offered to the public, are adversely affected—

(1)

when the obligor fails to provide a trustee to protect and enforce the rights and to represent the interests of such investors, notwithstanding the fact that (A) individual action by such investors for the purpose of protecting and enforcing their rights is rendered impracticable by reason of the disproportionate expense of taking such action, and (B) concerted action by such investors in their common interest through representatives of their own selection is impeded by reason of the wide dispersion of such investors through many States, and by reason of the fact that information as to the names and addresses of such investors generally is not available to such investors;

(2)

when the trustee does not have adequate rights and powers, or adequate duties and responsibilities, in connection with matters relating to the protection and enforcement of the rights of such investors; when, notwithstanding the obstacles to concerted action by such investors, and the general and reasonable assumption by such investors that the trustee is under an affirmative duty to take action for the protection and enforcement of their rights, trust indentures (A) generally provide that the trustee shall be under no duty to take any such action, even in the event of default, unless it receives notice of default, demand for action, and indemnity, from the holders of substantial percentages of the securities outstanding thereunder, and (B) generally relieve the trustee from liability even for its own negligent action or failure to act;

(3)

when the trustee does not have resources commensurate with its responsibilities, or has any relationship to or connection with the obligor or any underwriter of any securities of the obligor, or holds, beneficially or otherwise, any interest in the obligor or any such underwriter, which relationship, connection, or interest involves a material conflict with the interests of such investors;

(4)

when the obligor is not obligated to furnish to the trustee under the indenture and to such investors adequate current information as to its financial condition, and as to the performance of its obligations with respect to the securities outstanding under such indenture; or when the communication of such information to such investors is impeded by the fact that information as to the names and addresses of such investors generally is not available to the trustee and to such investors;

(5)

when the indenture contains provisions which are misleading or deceptive, or when full and fair disclosure is not made to prospective investors of the effect of important indenture provisions; or

(6)

when, by reason of the fact that trust indentures are commonly prepared by the obligor or underwriter in advance of the public offering of the securities to be issued thereunder, such investors are unable to participate in the preparation thereof, and, by reason of their lack of understanding of the situation, such investors would in any event be unable to procure the correction of the defects enumerated in this subsection.

(b) Declaration of policy

Practices of the character above enumerated have existed to such an extent that, unless regulated, the public offering of notes, bonds, debentures, evidences of indebtedness, and certificates of interest or participation therein, by the use of means and instruments of transportation and communication in interstate commerce and of the mails, is injurious to the capital markets, to investors, and to the general public; and it is hereby declared to be the policy of this subchapter, in accordance with which policy all the provisions of this subchapter shall be interpreted, to meet the problems and eliminate the practices, enumerated in this section, connected with such public offerings.

Source credit: (May 27, 1933, ch. 38, title III, § 302, as added Aug. 3, 1939, ch. 411, 53 Stat. 1150.)

history & why it existsrecord from the source credit

1933Enacted · Act of May 27, 1933, ch. 38 · 53 Stat. 1150

A history note hasn’t been published yet. The record shows enactment by ch. 38 on 1933-05-27.

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