Updating the Trust Indenture Act
Holders of publicly distributed debt securities are, in essence, parties to contracts of adhesion. There is no opportunity for a purchaser of a debt security to negotiate the terms of his loan to the issuer. In addition, because there are a large number of geographically scattered small lenders, each of them is placed in a particularly vulnerable position. While lenders traditionally have numerous methods of protecting their interests, creditor protection is ineffective unless responsibility for enforcement is centralized. Widely scattered security holders find it difficult to police compliance with covenants in the loan agreement and to coordinate legal action in case of default. Therefore, the debt holders’ interests are generally represented by a trustee who is given the responsibility of enforcing the loan provisions (and any related mortgage provisions) that are embodied in the indenture under which the securities are issued.