Bond Trustees Reexamine Role (1989)

Defaults prompt debate among trustees about their responsibilities. New guidelines may help Question: what is a bank's responsibility as a bond trustee? Answer: that's a good question, For the corporate trust side of banking, that's not a facetious answer The industry's role as trustee isn't new. How. ever, rising defaults have led to a reex amination of a bank's role as bond trustee by ABA and other organizations. New voluntary guidelines are currently being drafted to provide trustees with a standard of performance, In the past, the corporate trust industry was fragmented. People were not talking to each other, except on an informal basis, explains Jeff Powell, vicepresident at First National Bank of Chicago. There was no formal association, no formal focal point for trustees. In recent years, trustees have become more visible in the press and in court, notes Powell. One extreme example is the 1983 default by Washington Public Power Supply System on $2.25 billion of its Project 4 and 5 bonds. As a result, trustees have decided to start talking to each other, form a group, and work on guidelines and standards, says Powell, because someone else is going to mandate them if we don't. The basics. ABA figures indicate there are 1,926 trustee banks, which oversee 85,332 municipal bond issues totaling about $792 billion. An ABA guide defines the trustee's responsibilities under the Trust Indenture Act of 1939 as follows: holding and dealing with the security; enforcing the covenants set forth in the indenture; and enforcing the remedial provisions of the indenture if the issuer defaults on interest or principal payments or other obligations. (The indenture states the terms under which the bond is issued.) Generally the trustee also takes part in preparation of the indenture. Although it lacks the authority to dictate the final terms or conditions of the agreement, the trustee reviews the indenture after it is drafted. It then authenticates all securities certificates issued under an indenture. Now, complicate it. That's a relatively straightforward job so far However, neither the Trust Indenture Act nor any other law or regulation spells out the trustee's responsibilities when bonds are called by the issuer (redeemed prior to stated maturity) and redemptions are processed. Funds can be lost if a bond is not redeemed in a timely fashion. Negotiations may be necessary after such losses to determine who was at fault and who owes whom. To rectify this situation,the ABA Fiduciary & Securities Operations Division's Compensation Task Force will issue voluntary guidelines in August that define trustees' redemption duties. The guidelines will state that, in addition to those reviewed earlier, trustee's duties should also include: (1) Sending copies of all redemption notices to the three registered securities depositories-Depository Trust Co., Midwest Securities Trust Co., and Philadelphia Depository Trust Co. This must be done by registered, certified, or Express mail, or by fax machine. The original call or redemption notices would be sent to listed bondholders by first class mail. The redemption notices must contain: certificate and CUSIP numbers, to identify the bonds being called; the called amount for each certificate (for partial calls); the publication date; the redemption date and price; the redemption agent's name and address; the date of issue; the interest rate; the maturity date; and any other identifying information. (2) Sending all redemption notices to one or more information services of national recognition that disseminate redemption notices. (3) Flagging all envelopes containing redemption notices with a message such as Important Notice Enclosed. (4) Sending second redemption notices, in the aforementioned fashion, within 60 days to all holders who have not responded to the first notice. …