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TO AMEND THE SECURITIES ACT OF 1933

WEDNESDAY JULY 14, 1937

HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C. The committee was called to order 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.

Gentlemen of the committee, Mr. McCall, of Dallas, Tex., asked permission to be heard for about 15 minutes this morning and Commissioner Douglas has kindly consented to suspend his statement to permit the committee to hear Mr. McCall.

Mr. McCall, you may proceed.

STATEMENT OF JOHN D. McCALL, DALLAS, TEX.

Mr. McCall. Mr. Chairman and gentlemen of the committee, my name is John D. McCall. I am a lawyer whose business is confioed to the law questions pertaining to municipal and corporate financing; 95 percent of my business being concerned with municipal financing.

This statement is presented by me primarily as counsel for Cameron County, Tex., Brown County water improvement district no. 1 of Brown County, Tex., and Cameron County water improvement district no. 1, of Cameron County, Tex., and incidentally in behalf of the various municipal corporations and political subdivisions situated in the States of Texas and Florida, more particularly described in the schedule attached hereto, made a part hereof, and marked schedule A.

(The schedule referred to is as follows:)

SCHEDULE “A”

JULY 12, 1937. Memorandum to: Mr. John D. McCall. From: John D. McCall's office. The following is a statement of the municipal refunding programs that are in the process of completion out of this office, all of which, we think, will be affected adversely from the standpoint of the communities by the passage of H. R. 6968.

TEXAS

Mineral Wells.-This program involves the refunding of approximately $800,000 of the city debt, including a reduction of interest and extension of principal to relieve the tax burden. The city commission has approved the plan and authorized refunding bonds to be delivered to all holders. A majority of the creditors have approved the plan. It would seem, therefore, that the entire operation meets almost unqualified approval of the citizenship of the city as well as the creditors generally. This plan has been submitted to and approved by the United States district court.

а

City of Ennis, Tex.-- This program involves the refunding of approximately $500,000 of the city debt, including an extension of principal and reduction of interest. The responsible citizenship of the city of Ennis as well as the city officials themselves have approved the plan. It is believed that in the due course of business a majority of, if not all of, the holders of the city of Ennis debt will approve the plan. It is expected that this plan will be submitted to and approved by the United States district court.

City of Breckenridge, Tex.This program involves the refunding of approximately $640,000 of the city debt, including an extension of principal and reduction of interest. It is now in the process of completion. Upon completion, it will result in a reduction in the tax levy required against the Breckenridge property to support the debt. We believe that the citizenship of Breckenridge as well as the holders of the bonds are in a happy frame of mind with respect to the same. This plan has been submitted to and approved by the United States district court.

City of Belton.—This plan involves the refunding of approximately $600,000 principal amount of the Belton debt, including an extension of principal for 30 years and reduction of interest to as low as 174 percent per annum for the initial period. It likewise involves the release and cancelation of something over $100,000 of accrued and unpaid interest. The citizenship generally of the city has approved the plan, and it is believed that a majority of the Belton creditors will approve it. If the same can be completed, it will end approximately 15 years of expensive litigation by the composition of the differences heretofore existing between the creditors and debtor.

City of Harlingen, Tex.—The contemplated program here involves approximately $750,000 of debt. The plan is expected to extend the principal and reduce the interest, thus relieving the debt burden on the citizenship. We anticipate that & majority, if not all, of the creditors will approve the plan. Harlingen in now in default and unless and until a debt readjustment program is consummated, holders of the bonds as well as the property owners will suffer.

City of Stamford.--This plan contemplates the refunding of approximately $650,000 of the debt of the city and is now in the process of completion. It includes an extension of principal and reduction of interest. It will occasion considerable tax relief to the citizenship of this community and we think will prove acceptable to a majority of the holders.

City of Electra.- This plan involves the refunding of approximately $1,000,000 of the outstanding debt, including a very material extension of principal and reduction of interest to relieve the tax burden of the citizenship of this community and likewise satisfy the holders of its obligations. The city has been in litigation in the Federal courts for 2 or 3 years, and it is anticipated that this settlement will be adjudicated by the United States district court.

City of Childress.—This program involves the refunding of $235,000 of city debt, including an extension of principal and reduction of interest, thus relieving the tax burden on the citizenship of the community.

Kent County.--This program involves the refunding of all the outstanding road and bridge fund debt, aggregating $41,500 providing for a reduction of interest from 6 to 4 percent and an extension of time on principal. The refunding bonds have been authorized by the commissioners' court, pursuant to a special road law enacted by the legislature at the request of the county and proceedings are now pending in the attorney general's office for approval. The county has been in default on warrants for at least 5 years and a 15-cent limited tax will not retire the debt except on the basis provided in the refunding plan.

Motley County. This program involves the refunding of all the outstanding road and bridge fund debt, aggregating $54,700, providing for a reduction of interest from 6 to 4 percent and an extension of time on principal. The refunding bonds have been authorized by the commissioners' court, pursuant to a special road law enacted by the legislature at the request of the county and proceedings are now pending in the attorney general's office for approval.

Stonewall County, Tex.–Stonewall County refunding involves all three constitutional funds; that is, road and bridge, permanent improvement, and general fund. The refunding has already been completed with the exception of a few of the warrants outstanding against each of the road and bridge and general funds, and the balance represented by scrip warrants. The total amount of all issues is about $300,000, of which approximately $100,000 remain to be delivered.

City of Turkey, Tex.—The refunding program for the city of Turkey involves all the debt of the city which is represented by $42,000 of waterworks bonds and $41,000 of warrants issued for various improvements, all of the debt now bearing 6 percent interest and all being refunded at substantially reduced interest rates, in order that the city may be able to service and redeem the bonds on the basis of ts reduced valuations. This program is being handled under the jurisdiction of the Federal district court, at least so far as the $41,000 of warrants are concerned. It has been fully approved by the governing authority of the city and by substantially all of the bond- and warrant-holders.

City of Lockney.- Program involves the refunding of $163,800 of the city debt. The refunding has been approved not only by the majority of the bond and warrant holders but hy the city officials of the municipality and is being worked out under the jurisdiction of the Federal district court. The refunding program calls for a reduction of interest rates with resultant sayings to the city and it taxpayers.

City of Pittsburg.The refunding of the Pittsburg debt involves all outstanding bonds and warrants, aggregating approximately $237,000. The city has been badly in default for the past 5 years and now has approximately $26,000 of principal in default as well as approximately 172 years' interest on the total debt. The refunding program has not vet been fully developed but will involve at least 25-percent reduction in interest and some extension of time on principal. The program has not yet been submitted to the bondholders, except tentatively to a few of the larger holders who are co-operating with us in developing the terms.

Scurry County.-This reîunding operation involves the refunding of all of the outstanding indebtedness of the three constitutional tax funds of the county as follows: Permanent improvement fund.

$97, 500 General fund.

34, 000 Road and bridge fund...

180, 000 This program involves a reduction of interest of from 1 to 2 percent per annum, the interest rates on the original obligations ranging from 5 to 6 percent while the interest rate on the new bonds will be 4 percent, except on a small portion of them which will have a 412-percent rate. We believe the refunding is essential in view of the limited tax available and the reduced valuations and tax collections, and proceedings authorizing the refunding obligations have been approved by the commissioners' court of the county except on a portion of the road and bridge fund. So far no effort has made to contact the holders of the road-andbridge-fund debt but substantially all holders of the general fund and permanent improvement fund obligations so far contacted have unqualifiedly approved the refunding and two series of the permanent improvement refunding bonds are new in the process of being exchanged on the basis of 100-percent cooperation.

Following refunding programs pending in office probably adversely affected because issue in each instance is using services of independent contractor and trading necessary in most instances: Montague County road and bridge refunding bonds, series 1937-A, $16,034.06; city of Chillicothe refunding bonds, series 1937, $93,650, 5 percent; city of Miami refunding bonds, series 1937, $12,500, 5 percent; Henrietta I. S. D. refunding bonds, $97,500, 4 percent; Fieldton I. S. D. refunding bonds, $14,000; Floyd County road and bridge refunding bonds, series 1937, $23,000, 5 percent; Fannin County road and bridge refunding bonds, series 1937, $95,000, 414 percent; Pampa 1. S. D. refunding bonds, $75,000, 5 percent; city of Rising Star refunding bonds, $69,000, 5 percent; Mount Pleasant I. S. D. refunding bonds, $15,500; Montague County road and bridge funding bonds, $50,000; San Saba road and bridge funding bonds, $48,500, 42 percent; city of Snyder waterworks and sewer refunding bonds, series 1937, $44,400, 4 percent.

FLORIDA

Dade County (Miami), Fla., board of public instruction is engaged in refunding operations involving $8,000,000 and using services of houses which originally distribute bonds, which would be prohibited under Lea bill (am not representing this board in its refunding operations, but have been asked to represent its views before Interstate and Foreign Commerce Committee).

Mr. McCall. This statement shall be confined to a consideration of the effect of the legislation on municipal corporations and political subdivisions, for brevity termed public agencies".

I am hopeful that your committee will decide that the provisions of the bill should not be extended to include operations by municipal corporations and political subdivisions of States. The bill has been prepared in such form that all references to such public agencies could be eliminated by simple amendment.

If the committee should conclude that the operations of such public agencies must be included in the bill, I believe the bill as applied to public agencies should be amended so as to eliminate provisions: (a) Which would prohibit an underwriter from serving on a debt arrangement committee or from acting as an “independent contractor” in accomplishing the plan; and (b) which would prohibit such committees and independent contractors” from purchasing or trading in the securities. Reasons for the suggested amendment will be explained in a succeeding part of this statement.

The constitutionality of the provisions of the Act seeking to control public agencies is not conceded, but I am assuming that the committee will have convinced itself that such provisions are constitutional before passing the act or, in the alternative, that such provisions will be stricken from the bill if the committee entertains serious doubt as to the constitutionality of such provisions. If in a given case a political subdivision of the State should be able to establish to the court that the provisions of this act interfere with the exercise of its sovereign powers or the performance of duties imposed on it by the sovereign State, it is difficult to see how the court would sustain the constitutionality of the act in the light of the case of Ashton v. Cameron County Water Improvement District No. 1, decided by the Supreme Court on the 25th day of May 1936 (56 Sup. Ct. 892). Nor am I unmindful of the recent Panama Railroad Company case (57 Sup. Ct. 269), holding invalid an income tax levied by the State of New York, and the case of Brush v. The Commissioner of Internal Revenue, (57 Sup. Ct. 495), holding exempt from Federal income tax the salary of the chief engineer of the waterworks department of the city of New York.

The bill is designed, primarily, to protect investors from imposition by bondholders' committees organized for the purpose of obtaining control of securities to accomplish debt reorganizations, adjustments, and arrangements. The bill would confer certain authority on Securities and Exchange Commission concerning securities involved in three classes of operation: (a) Those growing out of reorganizations conducted by courts under section 77B of the Bankruptcy Act; (6) voluntary readjustments affecting securities other than municipal or foreign-debt securities; and (c) modification of the terms, priorities, rights, or privileges of municipal and foreign-debt securities.

This statement is not made in behalf of investors. Presumably investors feeling the necessity for the passage of this bill have appeared before the committee in its behalf. Probably the committee will determine that there is sufficient reason for protecting investors under classes (a) and (b). Then the committee will consider the recommendations made by the Securities and Exchange Commission for the protection of investors under the classification (c), namely, investors in municipal and in foreign-debt securities. If I recall correctly the complaints received and considered by the Commission in reference to municipal indebtedness committees were principally from and by issuing municipalities and not primarily from and by investors.

To a considerable extent the report of the Commission--part IV, Committees for the Holders of Municipal and Quasi-Municipal Obligations, April 30, 1937-is based on the testimony taken by the Wilcox subcommittee of the Sabath select committee. The hearing before the subcommittee of the Sabath select committee contains

about 238 pages of testimony and schedules, but evidently no investor appeared or communicated a desire to appear before the subcommittee. The Sabath committee report states that a petition bearing 500,000 signatures had been filed with the committee, asking an investigation of oppression by committees organized in reference to defaulted realestate bonds. But neither the Sabath committee report nor the included Wilcox subcommittee report mentions a single complaining holder of a municipal bond. And so far as I have been able to discern, neither does the report by the Commission specify a single complaining municipal bondholder.

If this bill is passed, I believe the interests of the large investors will not be affected so materially because under appropriate sections of the bill investors, not more than 12 in number, can operate debt refinancing arrangements without filing a declaration with the Commission. Ordinarily an agreement by 12 large investors should be sufficient to assure completion of a municipal debt-arrangement plan, but it does appear that insofar as small investors are concerned they would be placed at considerable disadvantage if no such agreement should be affected among the larger investors. Each individual bondholder would have to protect his own rights. Thus it is probable that the small investor who needs help would suffer under the bill. This, of course, could result in numerous suits against a defaulting municipality, which would place the municipalities again in the unenviable position they occupied before debt arrangements were undertaken a few years ago by responsible committees.

Before involving municipal securities in the bill, the committee should determine whether investors in municipal securities have evidenced an earnest desire that this legislation be passed.

At this time I am cooperating with not less than 25 municipalities and political subdivisions in their refinancing programs. My employment is at the instance of the municipalities. Selected as illustrative of their attitudes are two such public agencies. Before leaving Dallas, I received a telegram from Brown County water improvement district no. 1 as follows:

As counsel for this district please present to the House Committee on Interstate and Foreign Commerce our attitude toward H. R. 6968 by Congressman Lea. Public Works Administration has just recently authorized grant to district of approximately $450,000 contingent upon district's selling $600,000 in additional bonds and upon obtaining surrender of present outstanding bonds of the district amounting to approximately one and one half million dollars in exchange for refunding bonds bearing an interest rate reduction from 5/4 percent and 6 percent to 4 percent per annum and containing covenants subordinating rights of present bondholders to rights of purchasers of the new $600,000 bonds to be sold. District cannot possibly contact holders of original outstanding bonds and procure sale of new bonds without employing agency already designated by the district which agency includes underwriters which have sold the original bonds on the market and unless refinancing agency has power to purchase original bonds in connection with sale of new bonds. You will recall refinancing agency has not yet obtained the consent of any of the original holders since Government commitment was made only a few days ago. Please use diligent effort to convince committee that passage of this bill would prevent the completion of our project costing two and one half million dollars which prevented completion in turn would place Brownwood and the surrounding country under heavier tax burden and which vitally affects every person residing in district and city of Brownwood.

Likewise, I am in receipt of a telegram from Cameron County, Tex., as follows:

Cameron County is vitally interested in a refinancing program which it is just about to commence. The county has outstanding approximately $5,700,000 of road bonds which must be refunded in order to relieve pending defaults and to

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