Evening star., 1932-01-06
RULES ON TRUSTS
HELD BENEFICIAL
Growth of Investment Units
Strengthened, ]. S. Myers
Believes.
BY JOHN SHERMAN MYERS,

| earlier sponsors of fixed trusts who
never visualized so great public ap-
| probation of a comparatively new in
veStment vehicle.
| Some other facts which are. believe.
| approximately correct are interesting,
| however. In 1924 one fixed trust was
launched. In 1925 two more appeared.
| In 1925 none was offered. In 1927
| fresh interest was evidenced in this
medium for diversified common stock
| investment and new fixed trusts num-
bered eight. But it is the next four
years which are statistically significant.
| In 1928 there were u new offerings, in
| 1929 %, in 1880 SO (more than had
been offered in the preceding six years.
and in 1881 "a. The best figures I can
| obtain indicate that of 148 trusts SO are
| still active, and of these 4S have been
found unobjectionable by the Stock-list
| Committee of the New York Stock Ex-
change for association by member firms.
Seven Large Fixed Trusts.
1t should be recognized, too, that
| while all sorts of small organizations
undertook the formation of fixed trusts
only seven ever distributed as many as
! 100000 shares The largest, North
American Trust Shares, has passed the
81 100000 mark.
1t was assumed by the uninitiated
| that the creation and distribution of
| dxed-trust shares was highly profit
| able undertaking, and there was a rush
| OF sponsors-especially in 1880, when
the public was looking for the safe
guards provided by diversihcation and
found the conservative investment
policy embodied in the fixed trust at
| tractive. To most, these hopes of hand
some profits proved delusion. 1t was
| 1icnnxyarn@ tLnt hLn ~t~s
and distribution of fixed trust shares
could not be carried on with adequate
profit and with proper management ex-
| cept on large volume basis I believe,
| for example that records will show that
one OF the largest and most substantial
depositor corporations has made, during
! 1880, a net profit of less than per cent,
Regulation Called Beneficial.
This misconception of profits and the
| accompanying mushroom growth of
| fixed trusts had one fortunate effect.
| 1t turned the attention of quasi-regu-
latory bodies to the fixed trust Un-
! questionably the effects of such regu-
| lation have been beneficial Most i'm
portant of these examinations was that
| by the New York Stock Exchange which
eliminated in the issuance of certain
requirements on May 20, 1881.
TIE action of the exchange has
| standardized many features of the fixed
| trust, such as the method of describing
| them, the method of pricing and the
statements of charges. 1t has regulated
certain methods of sales presentation
| and advertising. Generally it has
strengthened the growth along sounder
| lines, with particular emphasis upon
complete disclosure, in standardized
Sayy ~ la
abling the investor to Judge the issue
on its merits without necessity Of pains
! taking research. While the stock ex-
change action was directed solely to q
| determination of what trusts were un-
| Objectionable for association by mem
| Der firms in their organization or in the
sale Of their securities, and in no sense
an attempt to enforce regulations upon
an enterprise outside of its Jurisdiction,
such regulatory action was eagerly ac-
cepted by the leading trusts and rec
tanning sound practices.
Two Methods Used.
BY the Fall of 1881 the fixed trust
had thus become recognized means OF
investment in common stocks, widely
accepted by the public. The foundation
had thus been laid for further and
more significant development. BY the
end of 1881 1t became apparent that
such development was progressing along
two lines. These are:
l. The increasing tendency to adopt
a more flexible policy with regard to
longer deemed of sufficiently high in
vestment quality-decisions based on
economic research There has been no
change in the exclusion Of the power TO
substitute.
2. The establishment Of a most i'm
portant precedent In the trust agree
ment of two trusts-North American
Trust Shares, 1855 and l956-in which
the trustee specifically undertakes to
serve for the full intended life of the
trusts and in which trustees continuing
fees and expenses are fully provided for
in advance
The significance of this second de-
velopment is, I believe, OF historic
Importance. In the past, due to the
newness of the fixed trust and lack OF
any precedents on which great bank
chosen to act as trustee might deter
mine what obligations it could reason
ably assume, the duties of the trustee
were largely those of a depository. The
relatively few functions it was willing
to assume it could relinquish at any
stances where the trustee did not spe-
ciically reserve the right to resign for
any reason, the subject was not men,
toned in the trust agreement. In these
new trust agreements, however, the
trustee agrees specifically that it will
not resign. Further, the trustee can
not be removed. And finally, the trust
cannot be terminated prior to its matu-
rity for any reason.
The principal cause for resignation,
in all probability, is that the trustee
would decide it was improbable to
continue to serve. If such were the
case, finding a substitute trustee would
be dificult, if not impossible If i'm
possible, the trust must be prematurely
liquidated and the funds returned to
the investor. Forced liquidation, while
not tragic under these circumstances,
is unfair.
Development Held Significant.
To the uninitiated this development
may not appear of great significance.
But it has already begun to attract
attention in leading finan-
cial circles. The burden of RESPONSE
biltties has been removed from the
shoulders of depositor corporations
(Which never wished to assume them)
and transferred to the trust company
which acts as trustee-a place where Ii
Is obvious it should be. AS precedent,
then, these trust agreements cannot be
overestimated and, to my mind, they
point to the way in which other fixed
trusts must develop during the next
few years.
INa V~K TaAA