The Trust Indenture Act of 1939, codified at, supplements the Securities Act of 1933 in the case of the distribution of debt securities in the United States. Generally speaking, the TIA requires the appointment of a suitably independent and qualified trustee to act for the benefit of the holders of the securities, and specifies various substantive provisions for the trust indenture that must be entered into by the issuer and the trustee. The TIA is administered by the US Securities and Exchange Commission, which has made various regulations under the act.
History
Section 211 of The Securities Exchange Act of 1934 mandated that the SEC conduct various studies. Although not expressly required to study the trustee system then in use for the issuance of debt securities, William O. Douglas, who would later become a Commissioner and then Chair of the SEC, was convinced by November 1934 that the system needed legislative reform. In June 1936, the Protective Committee Study, headed by Douglas, published its report Trustees Under Indentures. It recommended that:
trustees of indentures be disqualified where they have or acquire conflicts of interest incompatible with their fiduciary obligations;
they be transformed into active trustees with respect to their obligations; and
legislation separate from the Securities Exchange Act of 1934 would be more appropriate to govern this matter.
The Trust Indenture Act was subsequently passed and signed into law in August 1939. Its legislative history shows that that Congress intended to address deficiencies prevalent in trust indentures at the time:
Framework
Regulatory
Subject to certain exceptions, it is unlawful for any person to sell notes, bonds, or debentures in interstate commerce unless the security has been issued under an indenture and qualified under the Act. Trustees appointed under such indentures have specified duties: Complications as to financial reporting requirements can arise where the indentures are secured by a pledge of stock, in which case Rule 3-16 of Regulation S-X may come into play. Many issuers attempt to mitigate the impact by inserting "collateral cut-back" provisions into their indentures, but the SEC has not endorsed the concept that such a cut-back does not constitute a release of collateral.
Statutory prohibition of impairment
§ 316 provides that "the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder..." This prohibition is subject to several exceptions: This provision saw little litigation prior to 1992. Recent jurisprudence has expanded its reach, holding that the Act "protects the ability, and not merely the formal right, to receive payment in some circumstances," and ruling that impairment includes stripping a company's assets and removing any corporate guarantees. While this may result in more distressed issuers resorting to Chapter 11 to pursue restructuring efforts, other issuers may be prohibited from filing for such reliefby virtue of their reliance on federal funding or otherwiseand thus may be precluded from altering the repayment terms of their bond debt altogether.
