"[T]he Board of Visitors believes that the Council has been earnestly and actively endeavoring to obtain adequate consideration for American bondholders, and to accord them forceful and single-minded representation…the recognition it has obtained as a competent spokesman for American bondholders have discouraged foreign governments from taking unilateral action adversely affecting American bondholders."
Shortly after completion of the report, the SEC began actively working with the Foreign Bondholders Protective Council to create greater impartiality, transparency and efficacy. The State Department and the SEC agreed to serve on the FBPC's newly created Board of Visitors. The Board of Visitors was in part intended to assure the public that the FBPC was enacting the necessary reforms to adequately and fairly represent creditors. The Board of Visitors was granted the power to "visit the council, to examine its operations and expenditures, and to scrutinize and review" its use of funds.(8).
With its official appointment to the Board of Visitors, the SEC became increasingly involved in negotiations with foreign issuers of defaulted bonds. For example, in 1938, SEC Chairman William O. Douglas, the State Department, the FBPC, and the Cuban ambassador all were active in creating a settlement with Cuba on its defaulted bonds.(9)
The SEC's involvement with defaulted foreign loans was foundational in creating the SEC's position towards foreign issuers of securities sold to U.S. investors. The tremendous defaults on foreign bonds and the fraudulent activity which occurred in selling such bonds, combined with the lack of an international legal framework for bankruptcies, the limited jurisdiction that the SEC had abroad, and the conflicts of interest that plagued creditor committees, created, on the part of the SEC, an overall suspicion of foreign issuers which lasted well into the post-World War II period. When all of this was combined with foreign policy ramifications, the SEC found itself in a position in which it supported the Roosevelt administration's increasing desire to provide economic aid to foreign countries but preferred that American investors be insulated from the risks of any private investments.
(8) July 16, 1937 Memo from Samuel O. Clark, Jr. to the SEC Commission, with July 13, 1937 letter and report from J. Reuben Clark, Jr., Foreign Bondholders Protective Council, Inc. (courtesy of the National Archives and Records Administration)
(9) April 19, 1938 Memo from SEC Chairman William O. Douglas on Cuban Government Debt Plan (courtesy of the National Archives and Records Administration)
