Senator PROXMIRE. Why would any foreigner if they do not have to be identified-why would any foreigner object?

Mr. CALVIN. I think that goes back to my earlier statement: Why should he be required to give this certification? It carries with it an implication that he is not a desirable purchaser, and why is it really needed from an enforcement standpoint? Some of the witnesses, not us, but some of the other witnesses have just said flatly that this requirement will bring a halt to all foreign transactions in U.S. securi

ties.

We don't believe that.

Senator PROXMIRE. I think your position makes more sense. It might be annoying to some people. Conceivably in some cases they would say they would not buy here. But in many, many cases I presume they would. Their annoyance would be something that would be overcome by better yield or more liquid opportunities and so forth.

Mr. HAACK. Mr. Chairman, I think there is one other factor. Anyone who has done business abroad, either with individuals or with institutions, appreciates that there is a significant difference in temperament as far as Europeans versus Americans are concerned insofar as their desire to protect their privacy or their wish for secrecy and so forth. I think the European temperament is significantly different in this regard from that which it is in this country.

Mr. CALVIN. Mr. Chairman, if I might volunteer at this point, there is one thing that isn't in Mr. Haack's statement that we firmly believe. That is, that at the moment there is considerable interest in Europe. in developing markets in U.S. securities. As you probably know, on the Paris Bourse they now have a separate trading section in the afternoon where they trade only in American securities. You can go over to anyone of the major exchanges in Europe and they are now actively interested in trading in U.S. domestic securities. There is considerable incentive for them to do so. At the moment of course the markets are in the United States and in large measure will continue to be so. A requirement like this across the board coupled with, as Mr. Haack has said, this European temperament or disposition against Government intrusion into their financial affairs might serve as an incentive to accelerate this development in establishing markets in Europe in U.S. securities. This is just not a favorable development-even from their standpoint.

The fragmentation of the markets overall is not good and it is certainly not good in terms of our financial markets and our balance of payments in the United States. So if there is no strong enforcement reason why this type of requirement should be imposed, I think you are well advised from a business standpoint not to impose it.

Senator BENNETT. If these European markets in American securities continue to grow and develop, will they not offer a haven for the illegal money that we are trying to get at here, in which case we may actually be fraughting the very purpose that we are attempting to cure. Mr. HAACK. Very true. As a matter of fact there was an article in Barron's magazine I believe within the past 2 weeks relating to the increased activity of Europeans in domestic securities and great thrust was given to what they call an "Euroshare" market.

The "Euroshare" would be an equivalent of a bearer certificate which is not registered, which is freely transferrable and so forth, and it poses a significant threat and could be a haven.

Senator PROXMIRE. It is hard for me to see why the growth of a Euroshare market would adversely affect our balance of payments. The Euroshare market would still have to purchase any of its shares from this country.

Mr. HAACK. No, it could be floated over there, initially distributed. Senator PROXMIRE. If there are investments, say, in General Motors, for example, or in A.T. & T., wouldn't the proceeds come back to this country to our corporation, and wouldn't that be a wash then?

Mr. CALVIN. If I may try to answer that, in some cases, yes, but you could have it financed entirely in Europe maybe through an European subsidiary, a new issue, and the entire activity in that offering would be in Europe; in other words, the initial offering, the funds from the proceeds of the offering, would stay there and the trading in the securities would stay there.

Senator PROXMIRE. Who would make the offering? It wouldn't be made by the company?

Mr. CALVIN. It could be made by a subsidiary of the U.S. company. Senator PROXMIRE. So if they had holdings abroad, for example, if there were a Ford plant somewhere or a General Motors plant abroad, those funds would be expended abroad and raised abroad, and so forth? Mr. CALVIN. That's right.

Senator PROXMIRE. It would be related to our investment abroad as well as the securities market?

Mr. CALVIN. That's right. The other aspect of it, though, Sen

ator

Senator PROXMIRE. Let me interrupt to say that the decision, however, the vital decision, is whether the company would make a decision to invest in this country or abroad. If it decides to invest abroad even if the money were raised here, that money would be sent abroad to put to work.

Mr. CALVIN. They might be more prompted to make the decision to invest abroad if they knew they could raise the capital to establish that plant, or whatever it is, abroad also.

The other aspect of it is a more realistic one in present terms, and that is, as you know- -we have a table attached to our statement which includes the Treasury figures-on foreign stock purchases in the United States. Now, what will happen, as I mentioned, as trading in U.S. securities takes place there, the foreigner need not come to the United States to buy the 100 shares of XYZ Company that he presently has to buy here because that is where the market is.

So what may happen, will be that you do not eliminate his ability to invest in U.S. securities but do eliminate the necessity for coming to the United States to invest in U.S. securities, so the trading in U.S. securities abroad would be between foreigners.

Senator PROXMIRE. How would that affect the balance of payments? Mr. CALVIN. The present figures on foreign purchases of U.S. securities would be reduced.

Senator PROXMIRE. They would have to get the shares from somewhere, someone in this country?

Mr. CALVIN. No, what I am saying is as the markets develop there, they will have a greater flow

Senator PROXMIRE. But if there is a net increase, they have to get the shares from bere, the money would have to flow here.

Mr. CALVIN. In other words, I am saying they could trade with one another if they had the markets there, a marketplace at which to trade, which they presently do not have in depth, so they have to come to the United States for their trading.

Senator PROXMIRE. Purchases and sales are offsets. We are just talking about the net.

Mr. CALVIN. That's right.

Senator PROXMIRE. The net has to come from here.

Can you think of any legitimate reason why a U.S. citizen would not want his identity disclosed if he executed a securities order through a foreign bank account?

Mr. HAACK. I didn't hear the question.

Senator PROXMIRE. Can you think of any legitimate reason why a U.S. citizen would not want his identity disclosed if he executes a securities order through a foreign bank account?

Mr. HAACK. No.

Mr. CALVIN. No. If you are talking about section-what is it-31 (b) of the bill. We don't object to the requirement that the U.S. citizen give authorization that his identity be disclosed. We support that provision.

Mr. HAACK. I suppose there is one thing that would be perfectly legitimate, just as sometimes an individual or a corporation might wish to acquire a position in shares perfectly within all of the legal ramifications, it might do it on a concealed basis in this country and conceivably it might seek for greater concealment abroad. The fact that it is seeking the nondisclosure is not always to be equated with illegitimacy.

Senator PROXMIRE. Isn't it true though that under the rules of the New York Stock Exchange, your stock exchange, that U.S. broker/ dealers have an obligation to know who has a beneficial interest in a given transaction when it comes from a domestic source?

Mr. HAACK. Yes; we have a "know your customer" rule.

Senator PROXMIRE. Why shouldn't that "know your customer” rule apply on foreign transactions in stocks as well?

Mr. CALVIN. The answer is it applies with equal force. However, there is some difficulty in making this requirement apply in all situations and in dealing with foreign institutions. It is adequate as far as the exchange is concerned at the moment that the people handling that account be informed, that the people who are handling those transactions on behalf of the foreign account are authorized to do so. In other words, they don't attempt to delve into who is the beneficiary, ultimate beneficiary—the person having the beneficial interest. Senator PROXMIRE. But when you get an order from a foreign bank, you can't tell whether it is for the bank or for whom.

Mr. CALVIN. The same thing is true at the domestic bank.

Senator BENNETT. Senator, I can buy stock which would be issued in my name which I can then endorse and hand over to somebody else, and I think I have complied with the law. As far as the broker knows, the stock was issued in my name, but he has no way of knowing who actually holds the physical possession of the stock.

Senator PROXMIRE. Law enforcement agencies could also go to you in those circumstances and get the information. They can't go to a Swiss bank. They run into a veil which they cannot pierce.

Senator BENNETT. I would have to think that one over. I am not sure they can force me to disclose. As long as I am willing to take the responsibility of the ownership of the stock, I am not sure they can force me to disclose where it is actually held.

Senator PROXMIRE. Let me indicate what I am trying to get at. If we do not provide this disclosure and we continue to permit the manipulation of our securities markets through foreign banks accounts, don't we run the risk of weakening foreign confidence in our markets, thus adversely affecting our balance of payments?

Mr. CALVIN. This is one of the reasons why we support section 31 (b). I think this would solve the problem which you are raising—which is certainly based on a valid concern-and one of considerable concern to the New York Stock Exchange; that is, by requiring U.S. residents to identify or authorize themselves to be identified in their transactions abroad. Under this section, the SEC would also have the authority to require that these U.S. persons file periodic reports concerning all their transactions abroad.

This is a provision which we support.

Now, if you couple this with our other suggestion that the SEC be given the authority to require the certification or identification, on a selective basis, we think that the disclosure requirements are rather complete and the type of information you need from an enforcement standpoint should be made available, relying of course, on the SEC to exercise its judgment in a manner that is fair, which we expect they would do.

Senator PROXMIRE. I think that is a good suggestion, very helpful. Our purpose was that (a) gives us the authority to check up on (b). Suppose there is a certain percentage of illegitimate transactions which are curbed by the disclosure provisions of title IV and that the money goes elsewhere instead of returning to the United States. Are you saying that this is bad-that we should have no reduction in securities transactions or our balance of payments even if the present level can only be sustained by accepting illegal money? Doesn't this put us in the category of an "international fence"?

Mr. HAACK. If I had to make the hard choice, I would sit on the side of integrity.

Senator PROXMIRE. Spoken as a true Harvard Business School man and as a true Milwaukeean.

Senator BENNETT. The implication is he hopes he doesn't have to make the choice.

Senator PROXMIRE. The SEC and other enforcement officials have testified that the margin requirements can be better enforced if they apply both to the borrower as well as the lender regardless of whether the borrower borrows here or abroad. After all, the lender depends upon the certifications made by the borrower as the purpose for the loan. Hence, if the borrower deceives the lender in order to circumvent the margin requirements, why shouldn't the borrower be prosecuted? Mr. HAACK. This is a very interesting provision in the bill, and we think it is ingenious, but we think it might go too far.

Mr. CALVIN. Yes, in other words, we agree and support this proposal as it relates to U.S. persons who are receiving a loan from abroad, because I think as the testimony in the House hearings and here have indicated, there is no way to cover those transactions today. So, this is

a good and ingenious provision as it relates to U.S. persons getting loans abroad.

But this provision dosen't stop there, as you know. It applies to all borrowers. It doesn't draw the line as to whether the loan is to a person residing in Milwaukee getting a loan from a Milwaukee bank. That Milwaukee borrower will now also be subjected to margin requirements. We just ask the simple question, "Why?" Have there been abuses in this area? Does every borrower in the United States need to be regulated when getting a loan from a U.S. lender?

And we just don't think the present requirements have proved to be that ineffective as they relate to domestic transactions. As they relate to foreign transactions, this provision should be enacted into the law, but on domestic transactions we don't think it is really needed. I think under the present section 7(a) and the cases arising under it, if you do have a situation involving fraud, there are some aspects of 7(a) where borrowers might be covered. Precisely what they are at the moment, I don't know. But as I remember, you can extend 7(a) to borrowers if there is a fraudulent type of transaction. I think I am correct in that.

Senator PROXMIRE. Don't you feel that under present circumstances that a person or persons can violate our margin requirements in effect by simply borrowing abroad and borrowing on a margin that might be 10, 15, or 20 percent?

Mr. HAACK. Unquestionably.

Senator PROXMIRE. Which would be destabilizing, perhaps, if done in sufficient volume?

Senator BENNETT. It seems to me that when you are dealing with a loan made in the United States and the lender has the responsibility, you have a legal opportunity to get at the loan. You can get at one side of the loan. When you are dealing abroad, you can't get at the lender.

Mr. HAACK. Precisely.

Senator BENNETT. If you require that on the borrower here, you can get at the loan. So, I think in both cases you have an opportunity to get at the legality of the loan, and here you don't need two chances you already have one.

Mr. HAACK. Precisely.

Mr. CALVIN. That is our position much better stated than we have stated it, sir.

Senator PROXMIRE. My last question is, chapter 4 of title II authorizes the Secretary to issue regulations requiring the submission of reports or the keeping of records on transactions with foreign financial institutions. He has broad and liberal exemptive authority to exempt small or routine type transactions.

Yesterday, Robert Morgenthau, who was our first witness, said this chapter would be crucial to prosecutors obtaining evidence of the misuse of secret foreign bank accounts, and yet you recommend that it be eliminated. If you are concerned by the broad scope, why not limit that scope instead of dropping the provision altogether?

Mr. CALVIN. That is a valid point, and we did struggle with trying to limit the scope of this section. The problem there is that when you do that, when you try and limit the scope of the Secretary's rulemaking authority under this section, it becomes apparent-at least it did to