citizens and residents will be able to buy and sell shares of U.S. companies in these foreign markets without any particular difficulty. In our opinion, new section 31 (b) will be much more effective from a law enforcement standpoint and will not disrupt legitimate international securities transactions. The regulatory approach in section 31(b) should provide law enforcement authorities with the statutory means to combat evasions of U.S. laws in an effective way. This section requires the U.S. citizen or resident to authorize the disclosure of his identity and authorizes the SEC to require periodic reports of all securities transactions abroad. These two requirements, plus the disclosure on a U.S. taxpayer's Federal income tax return, as suggested by the Treasury Department, of the existence of any interest in a foreign bank account or other account in a foreign financial institution, should provide an effective means of stripping away the secrecy currently surrounding these transactions. If it is deemed necessary, as a further enforcement method, the Securities and Exchange Commission could be authorized to require the certification or identification on a selective basis in specific situations. This approach would have the advantage of flexibility in that an effort could be made to apply these requirements in a manner acceptable to foreign organizations and consistent with the requirements of local law. Further, if necessary, possible violations of U.S. laws might be pursued by requiring the certification or identification in specific cases. It is our understanding that the amendment to section 7(a) of the Securities Exchange Act of 1934 has been prompted by situations where U.S. persons have received loans from foreign institutions to purchase domestic securities. In some cases, these loans could not have been made by U.S. institutions without violating existing margin requirements. To deal with this situation, section 7(a) is being amended to apply the margin regulations to the borrower. However, the proposed new section 7(a) goes much further, in that it will apply to all borrowers, even those who receive loans from domestic lenders who are presently complying with the margin requirements. To our knowledge, there has been no showing that it is necessary or desirable to further extend margin regulation to borrowers receiving loans from U.S. institutions to purchase securities. Absent such a showing, it seems to us that the existing requirements have proven effective and the margin regulations need not be extended to borrowers receiving loans in the United States. In summary, we recognize the need for legislative action to reach organized criminal elements and law violators who attempt to escape detection because of the secrecy surrounding foreign bank accounts and transactions arising from these accounts. We have offered these suggestions today in an attempt to improve S. 3678, so that legitimate international transactions in securities are not unduly hampered. I should also like to submit, Mr. Chairman, a supplement to our testimony concerning certain technical suggestions which might be of interest to your committee. Senator PROXMIRE. Without objection, your attachment, and also your memorandum supplementing your testimony will be printed in the record at this point. (The supplemental memorandum and attachment follows:) MEMORANDUM SUPPLEMENTING TESTIMONY OF ROBERT W. HAACK Title IV of S. 3678 proposes a new Section 31 to the Securities Exchange Act of 1934. As presently written the new Section may be susceptible to some unintended and unfortunate interpretations. These could all be taken care of by redrafting the Section without affecting its intended objectives. Subsection (a) would prohibit any broker-dealer or bank from effecting any transaction in a domestic security "if such transaction was initiated by a foreign financial agency" unless at or before the time of the transaction certain information has been furnished by the foreign financial agency. The basic difficulty lies in the quoted phrase. The broker-dealer or bank effecting a particular transaction will ordinarily know only the party on the other side of the transaction with which it deals directly. That party may, in fact, be only an agent for a "foreign financial agency," but the broker-dealer or bank would not know this. If a foreign financial agency had "initiated" the trade, but had used one or more agents in completing it, the broker-dealer or bank would violate Section 31(a) if it did not receive the information required by the Subsection at or before the time of the transaction. This is obviously an inequitable result. If the language of the Subsection were re-drafted so that it would come into play only when the broker-dealer or bank dealt with a foreign financial agency knowingly, the unintended sweep of the Subsection would be avoided. Subsection (b) also might be interpreted to have an unintended and unfortunate consequence. As written, it precludes any United States citizen or resident from buying or selling directly or indirectly any domestic security from or through a foreign financial agency unless the United States citizen or resident gives certain written authority to the foreign financial agency and files such reports as the Securities and Exchange Commission may require. The unintended scope of the language used can be illustrated: Suppose a customer living in Kansas orders the purchase of 100 shares of U.S. Steel through his local broker, the trade to be executed on the New York Stock Exchange. The broker who executes the order purchases the stock from another broker who, in fact, but unbeknown to the buying broker, is selling the 100 shares for a foreign financial agency. Under these facts the Kansas resident, because he purchased a domestic security "indirectly" from a foreign financial agency, may be said to have violated Section 31(b), though of course he will have done so unintentionally and quite by chance. This example points up just one possibility of inadvertent violation of Section 31 (b). The language of the Subsection should be redrafted so that the only the citizen or resident who knowingly deals with the foreign financial agency is subject to the Subsection. A third difficulty with both Subsections (a) and (b) of proposed Section 31 arises because of the definition of "foreign financial agency" in Section 203 (h) of the Currency and Foreign Transactions Reporting Act included as Title II in S. 3678. That Section 203 (h) defines "foreign financial agency" to mean any financial agency (which term, of course, includes any bank, broker or dealer) "which transacts any business as such at any place not subject to the jurisdiction of the United States". Hence it might be argued that a domestic brokerage house having one or more foreign branch offices is, with respect to all its transactions (even its wholly domestic transactions) within the definition of "foreign financial agency". Any such interpretation would greatly increase the sweep and unintended consequence of Section 31. This result could be avoided by redefining the term "foreign" along the lines of the definition which was contained in H.R. 15073 as it passed the House of Representatives. That definition made it clear that the word "foreign" limited the applicability of the provision in question to those functions performed outside the United States. In addition, the opening clause of Section 31 (a) might be misconstrued. Presumably, that opening clause is intended to refer only to persons engaged in the business of effecting securities transactions for others or engaged in the business of buying and selling securities for his own account. It might, however, be misread, because as presently written it could be construed to apply to any person buying and selling securities for his own account whether or not as a part of a regular business. To overcome this construction the opening clause of the subsection should make clear that as to persons buying and selling securities for their own account, the subsection applies only to such persons who do so as a part of their regular business. Attached is a redraft of Section 31 incorporating all changes suggested to overcome the problems referred to above. The redraft also incorporates the New York Stock Exchange suggestion that Sub section (a) should apply only to those specific situations where deemed neces- "SEC. 31. (a) Whenever required in any particular case by such rules, regula- '(1) such foreign financial agency has disclosed to such person the (b) No citizen or resident of the United States shall knowingly, directly or '(1) gives a written authorization to such agency to disclose his identity '(2) files periodic reports with the Commission disclosing the details of (c) As used in this section, the term 'domestic security' means a security 1 Excludes transactions between foreigners, but includes transactions between Americans on foreign markets. 2 Excludes transactions between Americans, but includes transactions with other foreigners on American markets. 3 Negative figures indicate an outflow of capital from the United States. • Preliminary. Source: Treasury bulletin. Senator PROXMIRE. I would like to congratulate you, Mr. Haack, on the constructive nature of your testimony and especially on the general thrust which is one I think we can all support, that is, we should do all we can to encourage the investment by foreigners in this country and to take advantage of this great strength we have in our remarkable securities market. It is one of our prides. It is very helpful. You indicate that the certification or identification requirements of title IV should be used on a selective basis in specific situations. Could you indicate the situations in which you feel this authority would be appropriate? Mr. CALVIN. Yes, if I may, Mr. Chairman. Maybe I could shed some light on that. This could be done in a number of ways. I think that at a later point in Mr. Haack's statement he referred to the flexibility which could be developed if the SEC were given rulemaking authority, because what could be done is that the Commission or appropriate authorities in the Government could make arrangements and have discussions with foreign organizations and maybe develop requirements along the lines of those in the bill which would be acceptable to these people and which they would not consider to be burdensome. If the SEC had such rulemaking authority, that is one thing which could be done. Another possibility would be Senator PROXMIRE. What kind of guidance would you give the SEC? What would they cover or what would they exempt? Mr. CALVIN. In the supplemental statement we have a draft of suggested language of section 31, and what we have done, basically, is to take the present language in the bill, if you take a look at that, rather than require in every case we say "whenever required in any particular case by such rules or regulations or orders that the Commission may adopt as necessary and appropriate in the public interest." Senator PROXMIRE. What criteria? Mr. CALVIN. In terms as to when it should be required? I would say it would be twofold in my opinion. First of all, I think in some cases some foreign organizations would be willing to supply some type of a document, maybe in the form of a certificate, saying that all transactions they transmit to U.S. broker-dealers will be for the account of nonresidents of the United States, this type of thing. In other areas Senator PROXMIRE. Would this give the foreigner a veto power? Mr. CALVIN. No; it would not give them to veto power. That is the second point I am coming to. In other cases, say, for example, one of the earlier witnesses referred to a well known case where there were three Liechtenstein trusts and the Government was frustrated in its effort to get information arising from transactions with these trusts. What could be done is that the Commission could require that in all transactions that a U.S. brokerdealer had with, say, any trust in Liechtenstein, or at least any specific trust, that the certification or identification requirement must be complied with. If local law in that country, say Liechtenstein, did not permit the certification to be given, this might be an effective means of stopping transactions from arising. If local law did permit it, then certification could be used as the enforcement device, which seems to be the intent of the bill. In other words, the thrust of this, Mr. Chairman, is to give some flexibility but not to eliminate the requirement totally as some have suggested. We see some value in having this authority in the statute, but we see a lot of problems if it is required in every case. Senator PROXMIRE. That is very helpful. In fact, that is more constructive I think than the suggestion we got from the Treasury Department. Mr. CALVIN. I think they suggested it be eliminated, but I think they also indicated they may have some existing rulemaking authority that could be made to work in this area. Senator PROXMIRE. In your statement you indicate that a net capital inflow of almost $1.5 billion resulted from international securities transactions. During that same year, the unexplained capital outflowcommonly called "errors and omissions" was $3 billion or twice as great. Isn't it conceivable that some of the $1.5 billion inflow was really American money coming back from secret foreign bank accounts? Mr. HAACK. I would say there is a possibility. Senator PROXMIRE. We weren't able to get much of a statement from the Treasury Department as to what this might be. They said they just couldn't tell. Of course, it is hard to tell. Without legislation of this kind, it is very, very hard to estimate. They are going to try to reconsider it. I think conceivably it could be as much as $1 billion or $1.5 billion. A restriction in capital inflows on securities transactions would not necessarily impair our balance of payments if it were offset by a corresponding restriction in the outflow counted under "errors and omissions," isn't that true? Mr. HAACK. I would say so, yes. Senator PROXMIRE. Why would a foreign purchaser of U.S. stock object to having his identity made known to the U.S. broker-dealer who executes the order? After all, his identity isn't made public; it can only become available to law enforcement agencies through appropriate legal process. Mr. CALVIN. May I ask, would you state that again? Are you saying would the foreign person object to his identity being made know? Senator PROXMIRE. To the U.S. broker-dealer who executes the order. It is not made public. Mr. CALVIN. You are talking about the foreigner? Senator PROXMIRE. That is right, the foreign purchasers of U.S. stock. Mr. CALVIN. I think he would probably object from the standpoint of why he should be required to make this disclosure. In other words, as noted in the earlier part of Mr. Haack's statement, I think some people would say that by requiring this identification in every case it carries with it an implication that the foreign institution is suspected of some wrongdoing. In addition, as I understand section 31, the foreigner would not be required to identify himself but rather the foreign broker-dealer or the foreign financial agency would be required to certify that they are not acting for a U.S. person. In other words, I don't think they have to give up the name of the foreigner. Do they? The identification only applies when they are acting for U.S. residents. |