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Indenture
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

A deed or agreement under seal between two or more parties, so called because originally a deed was indented or zigzagged along one of the margins.  Since it was issued in duplicate, proof of genuineness or falsity of the documents was secured by comparing the indentations on the original with those on the duplicate.  If the documents were genuine the indentations would coincide.

Under the Trust Indenture Act of 1939, an indenture means any mortgage, deed of trust, trust, or other similar instrument or agreement under which securities are outstanding or are to be issued, whether or not any property, real or personal, is or is to be pledged, mortgages, assigned, or conveyed thereunder.  Indentures of securities offered for public sale and subject to the registration requirements of the Securities Act of 1933 must be qualified by the issuers with the Securities and Exchange Commission.  In addition to such content as details of the issue; description of the property pledged as a security (if any), protective provisions etc., indentures must contain the provisions specifically directed by the Trust Indenture Act of 1939 to be contained therein.  That act is particularly concerned with the powers and duties of the indenture trustee(s).  For example, the indenture to be qualified shall not contain any provisions relieving the indenture trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct ("exculpatory clauses"), except that:

  1. The indenture may contain provision that prior to default, the indenture trustee shall not be liable except for the performance of such duties as are specifically set out in the indenture.

  2. The indenture may contain provision that the indenture trustee may conclusively rely upon certificates or opinions conforming to the requirements of the indenture as to the truth of the statements and the correctness of the opinions expressed therein, in the absence of bad faith on the part of the trustee (but the indenture shall contain provisions requiring the trustee to examine the evidence furnished to it to determine whether or not such evidence conforms to the requirements of the indenture).

  3. The indenture may contain provision protecting the indenture trustee from liability for any error of judgment made in good faith by a responsible officer or officers of the trustee, unless it shall be proved that such trustee was negligent in ascertaining the pertinent facts.

  4. The indenture may contain provisions protecting the indenture trustee with respect to any action taken or omitted by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the indenture securities at the time outstanding, relating to the time, method, and place of conducting any proceeding for any remedy available to such trustee, or exercising any trust or power conferred upon the trustee under the indenture.

For indentures to be qualified the act requires that they contain provisions requiring the indenture trustee to give to the indenture security holders notice of all defaults known to the trustee within 90 days after their occurrence.  However, the indenture may provide, except in the case of default in payment of principal or interest or any sinking or purchase fund installment, that the trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or responsible officers of the trustee in good faith determines that the withholding of such notice is in the interests of the indenture security holders.

For trustees, perhaps the most significant required content of indentures under the Trust Indenture Act of 1939 is provision requiring the indenture trustee to exercise in case of default (as such is defined in the indenture) the rights and powers vested in the trustee by the indenture, and to use the same degree of care and skill in their exercise as a "prudent man" would exercise or use under the circumstances in the conduct of his own affairs.  Such adoption of the prudent man rule with respect to the trustee's duties after default was in line with the act's objective of making more effective representation and enforcement of indenture security holders' rights.

See INCORPORATED TRUSTEE

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