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

Cierra Murry is an experienced writer specializing in banking, credit cards, investing, loans, mortgages, and real estate. She has over 15 years of experience in financial analysis, underwriting, loan documentation, loan review, banking compliance, and credit risk management.

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

The Trust Indenture Act (TIA) of 1939 is a law that prohibits bond issues valued over $10 million (now updated to $50 million) from being offered for sale without a written agreement (an indenture). Both the bond issuer and the bondholder must sign the indenture, which fully discloses the bond issue details. It also requires the appointment of a trustee for all bond issues to protect bondholders’ rights.

In 2015, the SEC increased the reporting threshold to issues over $50 million.

Key Takeaways

• The Trust Indenture Act (TIA) of 1939 prohibits bond issues valued over $10 million (now updated to $50 million) from being offered without an indenture.
• A trust indenture is a contract between a bond issuer and an independent trustee to protect bondholders’ interests.
• The TIA addresses flaws in the trustee system and is administered by the Securities and Exchange Commission (SEC).

Understanding the Trust Indenture Act (TIA) of 1939

The Trust Indenture Act of 1939 was passed to protect bond investors by prohibiting the sale of debt securities in a public offering without a qualified indenture. The SEC administers the TIA.

The TIA was introduced as an amendment to the Securities Act of 1933 to enhance the role of indenture trustees and impose obligations on them, such as reporting requirements.

It addresses flaws in the trustee system by requiring trustees to maintain a list of investors for communication purposes. Before the TIA, trustees’ passive actions hindered collective bondholder action. The act grants investors substantive rights, including the ability to pursue legal action independently for payment.

The trustee must make semiannual disclosures to securities holders and may have the right to seize the bond issuer’s assets in case of insolvency, selling them to recover investments.

Requirements for Bond Issuers

Debt issuers must disclose the terms of a security through a trust indenture, a written contract between the bond issuer and an independent trustee. The SEC must approve this document.

The trust indenture outlines the terms and conditions that the issuer, lender, and trustee must adhere to during the bond’s lifespan, including protective or restrictive covenants.

The Trust Indenture Act of 1939 does not apply to securities exempt from regulation under the Securities Act of 1933, such as municipal bonds. Registration requirements may not apply to bonds issued during company reorganization or recapitalization.

Raising the interest rate on outstanding convertible bonds to discourage conversions does not require re-registering the securities. However, reorganized company bonds and convertible bonds with increased interest rates remain subject to the Trust Indenture Act provisions.