The Trust Indenture Act of 1939 mandates the use of a formal written agreement, or indenture, to fully disclose the legal obligations pertaining to certain debt securities or bonds, in general including debt securities sold in transactions registered with the Securities and Exchange Commission (SEC). Both the bond issuer and the bondholder must sign the indenture.
Administered by the SEC, the Trust Indenture Act also requires the appointment of an independent trustee to act for the benefit and protect of the rights of the holders of the securities. That trustee must make key financial disclosures to securities holders on a semi-annual basis.
The Act, which supplements the Securities Act of 1933, was intended to address flaws in the trustee system specifically that trust indentures at that time didn’t require evidence of an obligor’s performance, didn’t have to adhere to any disclosure or reporting requirements, and blocked collective bondholder action. The Trust Indenture Act protects holders’ rights to sue individually. It also exempts securities—typically municipal bonds—that aren’t subject to securities registration requirements.