15 U.S.C. § 77jjj — Eligibility and disqualification of trustee

submitted 93 years ago by ch. 38 to r/title-15-COMMERCE-AND-TRADE · 2,818 words · no verdicts yet

in plain englishAI-generated · not legal advice

Every bond indenture must have at least one qualified trustee, usually a supervised financial institution. This section sets who can serve and defines conflicts of interest that disqualify a trustee. A conflicted trustee must fix the conflict or resign, or a court can remove it.

(a) Who can be trustee Every indenture qualified under this subchapter must have one or more trustees at all times, and at least one must be an "institutional trustee" — a corporation formed and doing business under U.S., state, territorial, or D.C. law (or another person the SEC allows) that (A) has legal power to act as a corporate trustee and (B) is supervised or examined by a federal, state, territorial, or D.C. authority. The SEC may, by rule or by order on an application, let a foreign corporation or person serve as the sole trustee if it (i) has similar corporate trust powers under its own country's laws and (ii) is subject to oversight by that foreign government substantially equivalent to U.S. oversight — and only after considering whether a U.S. institutional trustee would be allowed to serve as sole trustee for securities sold in that foreign country. This institutional trustee must always have combined capital and surplus of at least $150,000. If it publishes financial condition reports at least once a year, the indenture can use the figure from its most recent published report to measure this. If the indenture allows or requires co-trustees along with the institutional trustee, the institutional trustee generally exercises the trustees' rights, powers, and duties — alone or jointly with the co-trustees — except that where the institutional trustee is legally unable to perform some specific act in a particular place, the co-trustees perform it instead. When the indenture securities are certificates of interest or participation in another security, the trustee has full legal power to exercise all the rights of a holder of that underlying security. No obligor on the bonds — and no one who directly or indirectly controls, is controlled by, or shares common control with the obligor — may serve as trustee. (b) When a trustee is disqualified If a trustee has a "conflicting interest" (defined below), it must, within 90 days of finding out, either eliminate the conflict or resign — unless the default the conflict relates to was already cured, waived, or otherwise eliminated before those 90 days ran out. If the trustee fails to comply, it must, within 10 more days, notify bondholders of that failure in the manner section 77mmm(c) describes. Then, unless the resignation duty has been stayed as described below, any bondholder who has held the bonds in good faith for at least six months may petition a court to remove the trustee and appoint a successor, if the trustee failed to comply after the holder made a written request. A trustee has a "conflicting interest" when the bonds are in default (not counting any grace period or notice requirement) and any of the following exist: (1) The trustee is also trustee under another indenture for other securities of the same obligor, or trustee for more than one outstanding series under this single indenture — unless (A) the bonds are collateral trust notes backed only by securities from that other indenture, (B) the other indenture is a collateral trust indenture backed only by these bonds, or (C) the obligor has no real unmortgaged assets, is mainly in the real estate business, and the two indentures are secured by wholly separate parcels of real estate. On top of that, the indenture is automatically treated as excluding other series or other indentures of the same obligor from this rule if all the indentures (and series) involved are wholly unsecured and rank equally, and are specifically described or later qualified under this subchapter — unless the SEC has found real differences between them likely to create a material conflict, or unless the issuer proves to the SEC, after a hearing, that the dual trusteeship isn't likely to create a material conflict. (2) The trustee, or one of its directors or executive officers, is an underwriter for the obligor. (3) The trustee directly or indirectly controls, is controlled by, or shares common control with an underwriter for the obligor. (4) The trustee or one of its directors or executive officers is also a director, officer, partner, employee, appointee, or representative of the obligor, or of an underwriter for the obligor who is currently in the underwriting business — except that (A) one person may be a director and/or officer of both the trustee and the obligor, but not an executive officer of both at the same time; (B) if the trustee's board has more than nine directors, one additional overlapping director is allowed; and (C) the trustee may still be designated by the obligor or its underwriter to serve as transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, depositary, or similar role — or, subject to paragraph (1), as trustee under another arrangement. (5) 10% or more of the trustee's voting stock is owned by the obligor, or by one of the obligor's directors, partners, or executive officers — or 20% or more is owned collectively by two or more such people. The same rule applies on the underwriter side: 10% or more owned by an underwriter for the obligor or one of its directors, partners, or officers, or a similar amount owned collectively by two or more of them. (6) The trustee owns, or holds as collateral for a debt that is in default, (A) 5% or more of the obligor's voting stock, or 10% or more of any other class of the obligor's securities — not counting the bonds themselves or securities issued under another indenture where the trustee is also trustee — or (B) 10% or more of any class of security of an underwriter for the obligor. (7) The trustee owns, or holds as collateral for a defaulted debt, 5% or more of the voting stock of someone who — to the trustee's knowledge — owns 10% or more of the obligor's voting stock, or controls or is under common control with the obligor. (8) The trustee owns, or holds as collateral for a defaulted debt, 10% or more of any class of security of someone who — to the trustee's knowledge — owns 50% or more of the obligor's voting stock. (9) As of the default date, or any anniversary while the default continues, the trustee owns — as executor, administrator, trustee of a will or living trust, guardian, conservator, or similar role — 25% or more of the voting stock, or of any class of security, of a person, where owning a smaller percentage would have counted as a conflict under (6), (7), or (8). An exception: securities the trustee only acquired by becoming executor or administrator of an estate don't count for up to two years after acquiring them, as long as they're no more than 25% of that class held in the estate. Promptly after any such default, and every year it continues, the trustee must check its own holdings in these fiduciary roles. If the obligor misses a principal or interest payment and stays 30 or more days late, the trustee must promptly check its fiduciary holdings as of that 30-day mark — and after that date, securities under the trustee's sole or joint control in these roles count as if the trustee owned them itself, for purposes of (6), (7), and (8). (10) Except in situations covered by section 77kkk(b)(1), (3), (4), (5), or (6), the trustee is or becomes a creditor of the obligor. For purposes of (1) above and section 77ppp(a), "series of securities" or "series" means a group of bonds under one indenture whose holders can vote or act separately from another such group — except that if all series under an indenture are wholly unsecured and rank equally, they don't count as separate "series" here. Listing these percentage thresholds in (5) through (9) doesn't mean owning that percentage is necessary or sufficient to prove "control" for purposes of (3) or (7). For (6), (7), (8), and (9): "security" means only ordinary corporate securities — not a note or other evidence of a loan from a bank, trust company, or banking firm, or a certificate of interest or participation in such a note. A debt counts as "in default" once a missed principal payment has continued uncured for 30 days or more. And the trustee is not treated as owning securities it merely holds (i) as collateral for a debt that is not in default, (ii) as collateral under this same indenture, regardless of any default, or (iii) as an agent for collection, custodian, escrow agent, or depositary. "Underwriter," for purposes of this subsection, means anyone who underwrote any of the obligor's securities that were outstanding within the past year. Except where the default is actually in principal, interest, or a sinking/purchase fund payment, a trustee is not required to resign under this subsection if it proves to the SEC, after applying and getting a hearing, that (i) the default can be cured or waived within a reasonable time under a described procedure, and (ii) staying the resignation duty won't hurt bondholders. Filing that application automatically pauses the resignation duty until the SEC orders otherwise. Finally, a trustee's resignation only becomes effective once a successor trustee is appointed and accepts the appointment.

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

(a) Persons eligible for appointment as trustee

(1)

There shall at all times be one or more trustees under every indenture qualified or to be qualified pursuant to this subchapter, at least one of whom shall at all times be a corporation organized and doing business under the laws of the United States or of any State or Territory or of the District of Columbia or a corporation or other person permitted to act as trustee by the Commission (referred to in this subchapter as the institutional trustee), which (A) is authorized under such laws to exercise corporate trust powers, and (B) is subject to supervision or examination by Federal, State, Territorial, or District of Columbia authority. The Commission may, pursuant to such rules and regulations as it may prescribe, or by order on application, permit a corporation or other person organized and doing business under the laws of a foreign government to act as sole trustee under an indenture qualified or to be qualified pursuant to this subchapter, if such corporation or other person (i) is authorized under such laws to exercise corporate trust powers, and (ii) is subject to supervision or examination by authority of such foreign government or a political subdivision thereof substantially equivalent to supervision or examination applicable to United States institutional trustees. In prescribing such rules and regulations or making such order, the Commission shall consider whether under such laws, a United States institutional trustee is eligible to act as sole trustee under an indenture relating to securities sold within the jurisdiction of such foreign government.

(2)

Such institution 1 trustee shall have at all times a combined capital and surplus of a specified minimum amount, which shall not be less than $150,000. If such institutional trustee publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, the indenture may provide that, for the purposes of this paragraph, the combined capital and surplus of such trustee shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.

(3)

If the indenture to be qualified requires or permits the appointment of one or more co-trustees in addition to such institutional trustee, the rights, powers, duties, and obligations conferred or imposed upon the trustees or any of them shall be conferred or imposed upon and exercised or performed by such institutional trustee, or such institutional trustee and such co-trustees jointly, except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed, such institutional trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties, and obligations shall be exercised and performed by such co-trustees.

(4)

In the case of certificates of interest or participation, the indenture trustee or trustees shall have the legal power to exercise all of the rights, powers, and privileges of a holder of the security or securities in which such certificates evidence an interest or participation.

(5)

No obligor upon the indenture securities or person directly or indirectly controlling, controlled by, or under common control with such obligor shall serve as trustee upon such indenture securities.

(b) Disqualification of trustee

If any indenture trustee has or shall acquire any conflicting interest as hereinafter defined—

(i)

then, within 90 days after ascertaining that it has such conflicting interest, and if the default (as defined in the next sentence) to which such conflicting interest relates has not been cured or duly waived or otherwise eliminated before the end of such 90-day period, such trustee shall either eliminate such conflicting interest or, except as otherwise provided below in this subsection, resign, and the obligor upon the indenture securities shall take prompt steps to have a successor appointed in the manner provided in the indenture;

(ii)

in the event that such trustee shall fail to comply with the provisions of clause (i) of this subsection, such trustee shall, within 10 days after the expiration of such 90-day period, transmit notice of such failure to the indenture security holders in the manner and to the extent provided in subsection (c) of section 77mmm of this title; and

(iii)

subject to the provisions of subsection (e) of section 77ooo of this title, unless such trustee’s duty to resign is stayed as provided below in this subsection, any security holder who has been a bona fide holder of indenture securities for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of such trustee, and the appointment of a successor, if such trustee fails, after written request thereof by such holder to comply with the provisions of clause (i) of this subsection.

For the purposes of this subsection, an indenture trustee shall be deemed to have a conflicting interest if the indenture securities are in default (as such term is defined in such indenture, but exclusive of any period of grace or requirement of notice) and—

(1)

such trustee is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of an obligor upon the indenture securities are outstanding or is trustee for more than one outstanding series of securities, as hereafter defined, under a single indenture of an obligor, unless—

(A)

the indenture securities are collateral trust notes under which the only collateral consists of securities issued under such other indenture,

(B)

such other indenture is a collateral trust indenture under which the only collateral consists of indenture securities, or

(C)

such obligor has no substantial unmortgaged assets and is engaged primarily in the business of owning, or of owning and developing and/or operating, real estate, and the indenture to be qualified and such other indenture are secured by wholly separate and distinct parcels of real estate:

Provided, That the indenture to be qualified shall automatically be deemed (unless it is expressly provided therein that such provision is excluded) to contain a provision excluding from the operation of this paragraph other series under such indenture, and any other indenture or indentures under which other securities, or certificates of interest or participation in other securities, of such an obligor are outstanding, if—

(i)

the indenture to be qualified and any such other indenture or indentures (and all series of securities issuable thereunder) are wholly unsecured and rank equally, and such other indenture or indentures (and such series) are specifically described in the indenture to be qualified or are thereafter qualified under this subchapter, unless the Commission shall have found and declared by order pursuant to subsection (b) of section 77eee of this title or subsection (c) of section 77ggg of this title that differences exist between the provisions of the indenture (or such series) to be qualified and the provisions of such other indenture or indentures (or such series) which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify such trustee from acting as such under one of such indentures, or

(ii)

the issuer shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under the indenture to be qualified and such other indenture or under more than one outstanding series under a single indenture is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify such trustee from acting as such under one of such indentures or with respect to such series;

(2)

such trustee or any of its directors or executive officers is an underwriter for an obligor upon the indenture securities;

(3)

such trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with an underwriter for an obligor upon the indenture securities;

(4)

such trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of an obligor upon the indenture securities, or of an underwriter (other than the trustee itself) for such an obligor who is currently engaged in the business of underwriting, except that—

(A)

one individual may be a director and/or an executive officer of the trustee and a director and/or an executive officer of such obligor, but may not be at the same time an executive officer of both the trustee and of such obligor,

(B)

if and so long as the number of directors of the trustee in office is more than nine, one additional individual may be a director and/or an executive officer of the trustee and a director of such obligor, and

(C)

such trustee may be designated by any such obligor or by any underwriter for any such obligor, to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this subsection, to act as trustee, whether under an indenture or otherwise;

(5)

10 per centum or more of the voting securities of such trustee is beneficially owned either by an obligor upon the indenture securities or by any director, partner or executive officer thereof, or 20 per centum or more of such voting securities is beneficially owned, collectively by any two or more of such persons; or 10 per centum or more of the voting securities of such trustee is beneficially owned either by an underwriter for any such obligor or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons;

(6)

such trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default as hereinafter defined—

(A)

5 per centum or more of the voting securities, or 10 per centum or more of any other class of security, of an obligor upon the indenture securities, not including indentures 2 securities and securities issued under any other indenture under which such trustee is also trustee, or

(B)

10 per centum or more of any class of security of an underwriter for any such obligor;

(7)

such trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default as hereinafter defined, 5 per centum or more of the voting securities of any person who, to the knowledge of the trustee, owns 10 per centum or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, an obligor upon the indenture securities;

(8)

such trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default as hereinafter defined, 10 per centum or more of any class of security of any person who, to the knowledge of the trustee, owns 50 per centum or more of the voting securities of an obligor upon the indenture securities;

(9)

such trustee owns, on the date of default upon the indenture securities (as such term is defined in such indenture but exclusive of any period of grace or requirement of notice) or any anniversary of such default while such default upon the indenture securities remains outstanding, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25 per centum or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7), or (8) of this subsection. As to any such securities of which the indenture trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which include them, the provisions of the preceding sentence shall not apply for a period of not more than 2 years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25 per centum of such voting securities or 25 per centum of any such class of security. Promptly after the dates of any such default upon the indenture securities and annually in each succeeding year that the indenture securities remain in default the trustee shall make a check of its holding of such securities in any of the above-mentioned capacities as of such dates. If the obligor upon the indenture securities fails to make payment in full of principal or interest under such indenture when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the trustee, with sole or joint control over such securities vested in it, shall be considered as though beneficially owned by such trustee, for the purposes of paragraphs (6), (7), and (8) of this subsection; or

(10)

except under the circumstances described in paragraphs 3 (1), (3), (4), (5) or (6) of section 77kkk(b) of this title, the trustee shall be or shall become a creditor of the obligor.

For purposes of paragraph (1) of this subsection, and of section 77ppp(a) of this title, the term “series of securities” or “series” means a series, class or group of securities issuable under an indenture pursuant to whose terms holders of one such series may vote to direct the indenture trustee, or otherwise take action pursuant to a vote of such holders, separately from holders of another such series: Provided, That “series of securities” or “series” shall not include any series of securities issuable under an indenture if all such series rank equally and are wholly unsecured.

The specification of percentages in paragraphs (5) to (9), inclusive, of this subsection shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this subsection.

For the purposes of paragraphs (6), (7), (8), and (9) of this subsection—

(A)

the terms “security” and “securities” shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies, or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness;

(B)

an obligation shall be deemed to be in default when a default in payment of principal shall have continued for thirty days or more, and shall not have been cured; and

(C)

the indenture trustee shall not be deemed the owner or holder of (i) any security which it holds as collateral security (as trustee or otherwise) for any obligation which is not in default as above defined, or (ii) any security which it holds as collateral security under the indenture to be qualified, irrespective of any default thereunder, or (iii) any security which it holds as agent for collection, or as custodian, escrow agent or depositary, or in any similar representative capacity.

For the purposes of this subsection, the term “underwriter” when used with reference to an obligor upon the indenture securities means every person who, within one year prior to the time as of which the determination is made, was an underwriter of any security of such obligor outstanding at the time of the determination.

Except in the case of a default in the payment of the principal of or interest on any indenture security, or in the payment of any sinking or purchase fund installment, the indenture trustee shall not be required to resign as provided by this subsection if such trustee shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that—

(i)

the default under the indenture may be cured or waived during a reasonable period and under the procedures described in such application, and

(ii)

a stay of the trustee’s duty to resign will not be inconsistent with the interests of holders of the indenture securities. The filing of such an application shall automatically stay the performance of the duty to resign until the Commission orders otherwise.

Any resignation of an indenture trustee shall become effective only upon the appointment of a successor trustee and such successor’s acceptance of such an appointment.

Source credit: (May 27, 1933, ch. 38, title III, § 310, as added Aug. 3, 1939, ch. 411, 53 Stat. 1157; amended Pub. L. 101–550, title IV, §§ 406–408, Nov. 15, 1990, 104 Stat. 2723, 2724; Pub. L. 111–203, title IX, § 986(b)(3), July 21, 2010, 124 Stat. 1936.)

history & why it existsrecord from the source credit

1933Enacted · Act of May 27, 1933, ch. 38 · 53 Stat. 1157
1990Amended · Pub. L. 101-550 · 104 Stat. 2723, 2724
2010Amended · Pub. L. 111-203 · 124 Stat. 1936

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

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