taken care of, the trust officer is in a position to work on the trusteeship itself. First of all he should make the analysis referred to in § 520. Then he should examine the trust property to see that it agrees with the description contained in the trust agreement. Of course, if it is real property he cannot make a physical examination but he should examine the title papers. This is a part of the work on which the advice of counsel for the trustee should be sought and relied upon. The counsel will then render an opinion as to the validity of the title. If the subject matter of the trust is real property, the trust deed must at once be recorded in the proper office of the state and county where the property is located.

The next step is to examine the issue itself; this includes the comparison of the bonds or notes with the original trust agreement. Obviously, it would be impracticable to compare each bond or note with the original. Comparisons are made by picking at random about every fiftieth bond or note and comparing it with the original. Then the bonds or notes are authenticated by the trust officer and his assistants. This consists in signing the certificate usually on the back or at the foot of the bond or note. What the trustee certifies to, is that the particular certificate is genuine. The customary wording is as follows: "This is one of the bonds described in the within mentioned trust deed."

The issue is then ready for delivery. Delivery may be made en bloc, that is to say, the entire issue may be delivered at one time; or it may be made in instalments, whichever the issuing corporation and its bankers have agreed upon. Upon delivery either directly or through the bankers, payment should be made to the corporation whose issue it is.

§ 522. Provision for Sinking Fund

Frequently it happens that the trust agreement or deed provides for a sinking fund. This, of course, means that a

fund is to be set aside for the purpose of redeeming the issue either at maturity or prior thereto. Where the trust instrument contains this kind of a provision the duty falls upon the trustee to see to it that the fund is set aside in accordance with such provision.

The terms of such provisions may and do vary considerably. It may be provided that a certain amount of cash be set aside each quarter, or semiannually, or annually. If the sinking fund is to be created for the purpose of redeeming the issue at maturity, then the trust instrument will most likely further provide that the trustee invest the cash; but if the sinking fund is to be used to redeem a part of the issue each year, the cash is likely to be held and lots are drawn to ascertain which bonds or notes are to be retired. Usually where bonds are called for redemption prior to maturity, they are called at a premium of one or more points.

The obvious reason for providing for a sinking fund is to add attractiveness to the issue by adding safety to it and thereby giving the issue a greater marketability. Of course, an issue with a wide and ready market is more easily sold than one with a poor market. Even if the trust agreement makes no provision for a sinking fund, sound financing demands that the corporation set aside sufficient money to redeem the issue at the maturity date. However, unless the trust agreement so provides, there is no legal obligation resting upon either the corporation or the trustee to do so.

§ 523. Trustee's Action in Case of Default

A properly drawn trust agreement always sets forth what the trustee is to do in the case of a default in any of the terms of the agreement by the corporation. In many of the agreements the trustee need do nothing until called upon by a given number of the holders of the issue, and then only if the holders of the issue indemnify the trustee. It is important from the

standpoint of the trustee that the agreement contain a provision of this character. If this provision were omitted the trustee might find itself obligated to bring an action to foreclose a mortgage without any assurance that it would ever get back the money it would cost to conduct the suit. If the proper number of the bondholders call upon the trustee to bring an action and indemnity satisfactory to the trustee or in accordance with the trust agreement is provided, the trustee must commence an action to foreclose the mortgage in order that the property which is the subject of the trust may be sold and the proceeds used, as far as they will go, to repay the holders of the bonds or notes.

In this connection protective committees are usually appointed. These committees are made up of the holders of the larger amounts of the bonds or notes. The object of these committees is to protect the holders of the particular issue they represent. In this manner, if there is any reasonably successful chance of re-arranging the financing of the cor poration which has defaulted, much money is saved, and many corporations have thus been saved for useful purposes. Much more on the subject of financing and refinancing corporations can be obtained from the many excellent works on corporate finance.

§ 524. Paying the Bondholders

A corporation, though solvent on the due date of the issue and able to pay the entire issue at that time, might at some later date become insolvent. All those who presented their bonds promptly would be paid. Those who had been slow in so doing would lose their money or at least be put to considerable trouble and probable expense if the trustee had failed to secure on the due date funds with which to pay all the bonds. As the trustee is trustee for those who are slow as well as for those who are prompt, this important duty should not be overlooked. No

matter when the bonds may be presented after the maturity date the money should be in the hands of the trustee.

The next step after having procured from the corporation the necessary funds with which to pay the bonds, is to receive the bonds as they are presented, to examine them, and to pay them. As the bonds are paid they should be canceled. When they are all paid or a large part of them, the best practice is to incinerate them and issue a certificate setting forth that bonds bearing certain numbers have been incinerated. This certificate is made by the trustee and is witnessed by a representative of the corporation and a representative of the trustee other than the officer who has executed the incineration certificate. (See Form 22.)

After all the cash to pay the bonds has been deposited with the trustee, the trustee may return the property which was the subject of the trust. Its duties with the exception of paying bonds the holders of which are slow in making presentation—are then complete and the trusteeship has terminated.

§ 525. The Fees Paid the Trustee

Usually the compensation of the bank or trust company for acting as trustee is divided into three classes. There is one fee for accepting the trusteeship. This is based on the size of the issue, the number of pieces, and the denominations into which the issue is divided. For a small issue of $100,000 or less than $500,000 this fee would probably be $1 a bond, assuming that the denominations were of $1,000. If they were smaller, $500 and $100, the fee ought to be about 50 cents per bond. The fee in the case of an issue of $1,000,000 and up to $10,000,000 where the bonds are in denominations of $1,000, is usually 50 cents per bond. Above this amount the rate of the fee should be proportionately lower.

Another fee would be charged for the care of the sinking fund. The amount of this fee would depend upon the amount

of the sinking fund and on the duties of the trustee with respect thereto. The variety of possible duties of the trustee is so great that it is useless to suggest a basis for this fee. Each case must be determined separately. Usually it is a question of striking a bargain with the proposed trustee.

And lastly, another fee is frequently and properly charged upon the maturity of the issue. This fee is figured on a percentage basis, often % per cent; sometimes where the issue is small and the denominations are small, the fee will be at the rate of 14 per cent. Another method of compensation upon the maturity of an issue is to require the corporation to deposit the principal amount of the issue thirty days in advance of the maturity date without interest. In addition to the fees that can be earned by the bank or trust company, it should be remembered that a deposit account will usually be opened with the institution by the corporation for which it is acting as trustee. The business is decidedly lucrative and in view of all the financing that is likely to be done in the near future, it can be truthfully said that the surface has as yet hardly been scratched.

REVIEW QUESTIONS

1. What is it that determines the obligation or responsibility of a trustee? In such an arrangement, what title does the trustee hold? How is the ownership of personal property in the hands of a trustee evidenced?

2. Why are banks and trust companies better qualified to act as trustees than individuals?

3. What is the object of a trust agreement?

4. What is the instrument that creates such an agreement generally

called? How are these classified? What is the function of a bond? What is a first mortgage bond? What is a debenture bond? What is an income bond?

5. What is stock? How does it differ from a bond? What is the

object of a trust agreement?