"This means that the basis for regulation must be broader than mere disclosure; it must be directed towards the elimination of material conflicts of interest and unconscionable practices. Furthermore, methods must be designed to bring under regulation and control committees and other agencies presently exempt and immune from any supervision."
- May 14, 1937 SEC Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees – Part V: Protective Committees and Agencies for Defaulted Foreign Government Bonds, 737
As these events were unfolding, the U.S. Securities and Exchange Commission was appointed by Congress to conduct a major study of creditor committees. A significant part of the study, delivered to Congress in 1937, investigated and analyzed foreign bondholder committees, including the Foreign Bondholders Protective Council. The SEC's involvement was logical as Title II of the 1933 Act provided for a government-sanctioned corporation to protect American holders of defaulted foreign securities.(6) Part of the study's mission was to analyze whether such a corporation should be created.
The SEC report carefully analyzed the various options available to bondholders of defaulted foreign securities as well as what U.S. policy should be in connection with such bonds. It found that international law was of little help in forcing debtor nations to pay their loans, in part because there was no international bankruptcy law. It further concluded that U.S.-imposed economic sanctions were not in the long-term best interest of the U.S.
The report also condemned the use of armed force, which the U.S. had used in the past against debtor nations, as a violation of international law. Instead, the SEC endorsed negotiating with debtor nations as the most effective way to proceed and it encouraged creditors to be flexible and sensitive to the needs of these countries. The SEC's conclusions fully backed the Roosevelt administration's foreign economic policy. Simultaneously, the report recognized the importance of the U.S. adhering to international law while acknowledging its significant limitations.
The report further examined how existing creditor committees functioned, concluding that such committees possessed "extensive power, free from control or restraint."(7) It was particularly concerned that committees had multiple conflicts of interest, as investment banks, which had underwritten the securities, dominated the committees and often negotiated better deals for themselves than for individual investors.
The report was a bit more laudatory of the Foreign Bondholders Protective Council. It, however, found that from its establishment, the FBPC was hampered by its funding by investment banks, as the government did not provide it with financial support. The SEC believed this was an inherent conflict of interest.
The report then turned to Title II of the 1933 Act, which provided for the establishment of a Corporation of Foreign Security Holders which would have been government funded and directed. The Act, however, provided that the title would only take effect when the President declared it to be in the national interest. By 1937, Roosevelt had not yet done so and a number of government officials, including those from the State Department, objected to such direct government involvement. Adopting the position of Roosevelt and the State Department, the SEC warned that the government should not put itself in the position of becoming an international collection agency.
The SEC set forth a number of suggestions. It found that the establishment and activities of foreign creditor committees were unregulated by the U.S. Securities Acts in existence at the time. Such lack of regulation left investors unprotected, with little choice but to be represented by committees, even those with serious conflicts of interest.
The report recommended the continued use of protective committees but with new regulations that would prohibit underwriters or others with a potential conflict of interest from being on such committees. It also articulated the need for a centralized entity that would be above reproach, and concluded that Title II should not be implemented but rather that the FBPC should be strengthened. The report suggested the implementation of various internal and institutional structures to ensure the FBPC's independence and impartiality.
(6) 73rd Congress, Sess. 1, Ch.38, Sec. 201-212 (May 27, 1933).
(7) May 14, 1937 SEC Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees – Part V: Protective Committees and Agencies for Holders of Defaulted Foreign Government Bonds, 37 (Government Records).
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