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

Page 185 TITLE 15—COMMERCE AND TRADE § 77jjj 1 So in original. Probably should be ‘‘institutional’’. (e) Power of Commission to conduct investiga- tion Nothing in this subchapter shall be construed as empowering the Commission to conduct an investigation or other proceeding for the pur- pose of determining whether the provisions of an indenture which has been qualified under this subchapter are being complied with, or to en- force such provisions. (May 27, 1933, ch. 38, title III, § 309, as added Aug. 3, 1939, ch. 411, 53 Stat. 1157; amended Pub. L. 101–550, title IV, § 405, Nov. 15, 1990, 104 Stat. 2723.) Editorial Notes AMENDMENTS 1990—Subsec. (b). Pub. L. 101–550 inserted before pe- riod at end ‘‘, or the failure of the issuer to file an ap- plication as provided for by section 77eee(b)(2) of this title’’. Executive Documents TRANSFER OF FUNCTIONS For transfer of functions of Securities and Exchange Commission, with certain exceptions, to Chairman of such Commission, see Reorg. Plan No. 10 of 1950, §§ 1, 2, eff. May 24, 1950, 15 F.R. 3175, 64 Stat. 1265, set out under section 78d of this title. § 77jjj. Eligibility and disqualification of trustee (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 au- thorized 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, per- mit a corporation or other person organized and doing business under the laws of a foreign gov- ernment to act as sole trustee under an inden- ture qualified or to be qualified pursuant to this subchapter, if such corporation or other person (i) is authorized under such laws to exercise cor- porate trust powers, and (ii) is subject to super- vision or examination by authority of such for- eign government or a political subdivision thereof substantially equivalent to supervision or examination applicable to United States in- stitutional trustees. In prescribing such rules and regulations or making such order, the Com- mission shall consider whether under such laws, a United States institutional trustee is eligible to act as sole trustee under an indenture relat- ing 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 speci- fied minimum amount, which shall not be less than $150,000. If such institutional trustee pub- lishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, the inden- ture 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 re- cent 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 trust- ee, the rights, powers, duties, and obligations conferred or imposed upon the trustees or any of them shall be conferred or imposed upon and ex- ercised or performed by such institutional trust- ee, or such institutional trustee and such co- trustees jointly, except to the extent that under any law of any jurisdiction in which any par- ticular act or acts are to be performed, such in- stitutional trustee shall be incompetent or un- qualified to perform such act or acts, in which event such rights, powers, duties, and obliga- tions shall be exercised and performed by such co-trustees. (4) In the case of certificates of interest or par- ticipation, 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, con- trolled by, or under common control with such obligor shall serve as trustee upon such inden- ture 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 elimi- nated before the end of such 90-day period, such trustee shall either eliminate such con- flicting interest or, except as otherwise pro- vided below in this subsection, resign, and the obligor upon the indenture securities shall take prompt steps to have a successor ap- pointed in the manner provided in the inden- ture; (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 inden- ture 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 be- half of himself and all others similarly situ- ated, petition any court of competent jurisdic- tion for the removal of such trustee, and the Page 186 TITLE 15—COMMERCE AND TRADE § 77jjj 2 So in original. Probably should be ‘‘indenture’’. 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 inden- ture trustee shall be deemed to have a con- flicting interest if the indenture securities are in default (as such term is defined in such inden- ture, but exclusive of any period of grace or re- quirement of notice) and— (1) such trustee is trustee under another in- denture under which any other securities, or certificates of interest or participation in any other securities, of an obligor upon the inden- ture securities are outstanding or is trustee for more than one outstanding series of securi- ties, as hereafter defined, under a single inden- ture 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 collat- eral consists of indenture securities, or (C) such obligor has no substantial unmortgaged assets and is engaged pri- marily in the business of owning, or of own- ing and developing and/or operating, real es- tate, 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 ex- pressly provided therein that such provision is excluded) to contain a provision excluding from the operation of this paragraph other se- ries under such indenture, and any other in- denture or indentures under which other secu- rities, or certificates of interest or participa- tion 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 se- ries) are specifically described in the inden- ture to be qualified or are thereafter quali- fied under this subchapter, unless the Com- mission 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 be- tween the provisions of the indenture (or such series) to be qualified and the provi- sions of such other indenture or indentures (or such series) which are so likely to in- volve 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 bur- den of proving, on application to the Com- mission and after opportunity for hearing thereon, that trusteeship under the inden- ture 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 ex- ecutive officers is an underwriter for an obli- gor upon the indenture securities; (3) such trustee directly or indirectly con- trols 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 ex- ecutive 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 di- rector and/or an executive officer of such ob- ligor, 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 direc- tors of the trustee in office is more than nine, one additional individual may be a di- rector 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 trans- fer 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 sub- section, to act as trustee, whether under an indenture or otherwise; (5) 10 per centum or more of the voting secu- rities of such trustee is beneficially owned ei- ther by an obligor upon the indenture securi- ties 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 per- sons; 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 offi- cer thereof, or is beneficially owned, collec- tively, 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 se- curities, or 10 per centum or more of any other class of security, of an obligor upon the indenture securities, not including in- dentures 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 obli- gor; (7) such trustee is the beneficial owner of, or holds as collateral security for an obligation Page 187 TITLE 15—COMMERCE AND TRADE § 77jjj 3 So in original. Probably should be ‘‘paragraph’’. 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 secu- rities 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 trust- ee, owns 50 per centum or more of the voting securities of an obligor upon the indenture se- curities; (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 de- fault upon the indenture securities remains outstanding, in the capacity of executor, ad- ministrator, 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 securi- ties, or of any class of security, of any person, the beneficial ownership of a specified percent- age of which would have constituted a con- flicting interest under paragraph (6), (7), or (8) of this subsection. As to any such securities of which the indenture trustee acquired owner- ship through becoming executor, adminis- trator or testamentary trustee of an estate which include them, the provisions of the pre- ceding 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 cen- tum of any such class of security. Promptly after the dates of any such default upon the indenture securities and annually in each suc- ceeding year that the indenture securities re- main 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 inter- est under such indenture when and as the same becomes due and payable, and such fail- ure continues for 30 days thereafter, the trust- ee shall make a prompt check of its holdings of such securities in any of the above-men- tioned capacities as of the date of the expira- tion 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 de- scribed 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 sub- section, 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 se- curities’’ or ‘‘series’’ shall not include any series of securities issuable under an indenture if all such series rank equally and are wholly unse- cured. 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 di- rect or indirect control for the purposes of para- graph (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 gen- erally known as corporate securities, but shall not include any note or other evidence of in- debtedness 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 de- fault 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 trust- ee or otherwise) for any obligation which is not in default as above defined, or (ii) any se- curity which it holds as collateral security under the indenture to be qualified, irrespec- tive of any default thereunder, or (iii) any se- curity 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 trust- ee shall not be required to resign as provided by this subsection if such trustee shall have sus- tained the burden of proving, on application to the Commission and after opportunity for hear- ing thereon, that— (i) the default under the indenture may be cured or waived during a reasonable period and under the procedures described in such ap- plication, and (ii) a stay of the trustee’s duty to resign will not be inconsistent with the interests of hold- ers 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. Page 188 TITLE 15—COMMERCE AND TRADE § 77kkk Any resignation of an indenture trustee shall become effective only upon the appointment of a successor trustee and such successor’s accept- ance of such an appointment. (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.) Editorial Notes AMENDMENTS 2010—Subsec. (c). Pub. L. 111–203 struck out subsec. (c). Text read as follows: ‘‘The Public Utility Holding Company Act of 1935 shall not be held to establish or authorize the establishment of any standards regarding the eligibility and qualifications of any trustee or pro- spective trustee under an indenture to be qualified under this subchapter, or regarding the provisions to be included in any such indenture with respect to the eli- gibility and qualifications of the trustee thereunder, other than those established by the provisions of this section.’’ 1990—Subsec. (a)(1). Pub. L. 101–550, § 406(1)–(4), sub- stituted ‘‘There shall’’ for ‘‘The indenture to be quali- fied shall require that there shall’’, and ‘‘under every indenture qualified or to be qualified pursuant to this subchapter’’ for ‘‘thereunder’’, inserted ‘‘or a corpora- tion or other person permitted to act as trustee by the Commission’’ before ‘‘(referred to’’, and inserted at end ‘‘The Commission may, pursuant to such rules and reg- ulations 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 cor- poration or other person (i) is authorized under such laws to exercise corporate trust powers, and (ii) is sub- ject 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 eligi- ble to act as sole trustee under an indenture relating to securities sold within the jurisdiction of such foreign government.’’ Subsec. (a)(2). Pub. L. 101–550, § 406(5), which directed the substitution of ‘‘Such institution’’ for ‘‘The inden- ture to be qualified shall require that such institu- tion’’, was executed by making the substitution for ‘‘The indenture to be qualified shall require that such institutional’’, as the probable intent of Congress. Subsec. (a)(3). Pub. L. 101–550, § 406(6), struck out ‘‘such indenture shall provide that’’ before ‘‘the rights’’. Subsec. (a)(4). Pub. L. 101–550, § 406(7), (8), struck out ‘‘the indenture to be qualified shall require that’’ be- fore ‘‘the indenture’’ and inserted ‘‘shall’’ after ‘‘trust- ee or trustees’’. Subsec. (a)(5). Pub. L. 101–550, § 407, added par. (5). Subsec. (b). Pub. L. 101–550, § 408, amended subsec. (b) generally. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2010 AMENDMENT Amendment by Pub. L. 111–203 effective 1 day after July 21, 2010, except as otherwise provided, see section 4 of Pub. L. 111–203, set out as an Effective Date note under section 5301 of Title 12, Banks and Banking. Executive Documents TRANSFER OF FUNCTIONS For transfer of functions of Securities and Exchange Commission, with certain exceptions, to Chairman of such Commission, see Reorg. Plan No. 10 of 1950, §§ 1, 2, eff. May 24, 1950, 15 F.R. 3175, 64 Stat. 1265, set out under section 78d of this title. § 77kkk. Preferential collection of claims against obligor (a) Trustee as creditor of obligor Subject to the provisions of subsection (b) of this section, if the indenture trustee shall be, or shall become, a creditor, directly or indirectly, secured or unsecured, of an obligor upon the in- denture securities, within three months prior to a default as defined in the last paragraph of this subsection, or subsequent to such a default, then, unless and until such default shall be cured, such trustee shall set apart and hold in a special account for the benefit of the trustee in- dividually and the indenture security holders— (1) an amount equal to any and all reduc- tions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such three months’ period and valid as against such obligor and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this subsection, or from the exercise of any right of setoff which the trust- ee could have exercised if a petition in bank- ruptcy had been filed by or against such obli- gor upon the date of such default; and (2) all property received in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such three months’ period, or an amount equal to the proceeds of any such property, if dis- posed of, subject, however, to the rights, if any, of such obligor and its other creditors in such property or such proceeds. Nothing herein contained shall affect the right of the indenture trustee— (A) to retain for its own account (i) pay- ments made on account of any such claim by any person (other than such obligor) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the trustee to a third person, and (iii) distributions made in cash, securities, or other property in re- spect of claims filed against such obligor in bankruptcy or receivership or in proceedings for reorganization pursuant to the Bankruptcy Act or applicable State law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such three months’ period; (C) to realize, for its own account, but only to the extent of the claim hereinafter men- tioned, upon any property held by it as secu- rity for any such claim, if such claim was cre- ated after the beginning of such three months’ period and such property was received as secu- rity therefor simultaneously with the creation thereof, and if the trustee shall sustain the burden of proving that at the time such prop- erty was so received the trustee had no reason- able cause to believe that a default as defined in the last paragraph of this subsection would occur within three months; or