Trust Indenture Act (TIA) of 1939: History and Requirements

What Is the Trust Indenture Act (TIA) of 1939?

The Trust Indenture Act (TIA) of 1939 is a law that prohibited bond issues valued over $10 million from being offered for sale without a formal written agreement (an indenture). Both the bond issuer and the bondholder must sign the indenture, and it must fully disclose the particulars of the bond issue. It also requires that a trustee be appointed for all bond issues so that the rights of bondholders are not compromised.

In 2015, the SEC finalized a rule change that increased the reporting threshold to issues over $50 million.

Understanding the Trust Indenture Act (TIA) of 1939

Congress passed the Trust Indenture Act of 1939 to protect bond investors. It prohibits the sale of any debt securities in a public offering unless they are issued under a qualified indenture. The Securities and Exchange Commission (SEC) administers the TIA.

The Trust Indenture Act was introduced as an amendment to the Securities Act of 1933 to make indentured trustees more proactive in their roles. It puts some obligations directly on them, such as reporting requirements.

TIA was intended to address flaws in the trustee system. For example, trustees’ passive actions blocked collective bondholder action before the TIA. Individual bondholders could theoretically force action but often only if they could identify other bondholders who would act with them.

Collective action was frequently impractical given the wide geographical distribution of all bondholders of an issue. With the act, trustees are required to make a list of the investors available so they can communicate with each other.

The TIA of 1939 gave investors more substantive rights, including the right for an individual bondholder to independently pursue legal action to receive payment. The TIA requires that the hired trustee be free of conflicts of interest involving the issuer.

The trustee must also make semiannual disclosures of pertinent information to the securities holders. If a bond issuer becomes insolvent, the appointed trustee may have the right to seize the bond issuer's assets. The trustee can then sell the assets to recoup the bondholders' investments.

Requirements for Bond Issuers

Debt issuers are expected to disclose the terms under which a security is issued with a formal written agreement known as a trust indenture. A trust indenture is a contract entered into by a bond issuer and an independent trustee to protect the interests of bondholders. The SEC must approve this document.

The trust indenture highlights the terms and conditions that the issuer, lender, and trustee must adhere to during the life of the bond. Any protective or restrictive covenants, such as call provisions, must be included in the indenture.

Securities that are not subject to regulation under the Securities Act of 1933 are exempt from the Trust Indenture Act of 1939. For example, municipal bonds are exempt from the TIA. Securities registration requirements do not apply to bonds issued during a company reorganization or recapitalization.

According to the SEC, raising the interest rate on outstanding convertible bonds to discourage conversions does not also require registering the securities again. However, bonds of reorganized companies and convertible bonds with increased interest rates continue to fall under the provisions of the Trust Indenture Act.

The Bottom Line

The Trust Indenture Act of 1939 was intended to supplement the Securities Act of 1933 with the overall goal of protecting investors; in this instance, bond investors. It enacted law that required bond offerings over $10 million to be fully disclosed, putting some of the responsibility on indentured trustees. As bond issues grew over time, the SEC updated the $10 million to $50 million.