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us—that the type of information that you need from the enforcement standpoint will be produced by this new requirement in section 31 (b) that we have been talking about and by the disclosure on a Federal income tax return of the existence of any interest in a foreign bank account.
In other words, those two requirements, the reporting on your tax return requirement the Treasury has talked about, and this new requirement that is in the bill here
Senator PROXMIRE. 31 (b) only applies to securities, doesn't it? It doesn't apply to gold or commodities, does it? I wish you would struggle some more on this and give us some language when you correct your remarks. Will you do that? Mr. CALVIN. Yes; we will. (The information referred to follows:)
NEW YORK STOCK EXCHANGE,
New York, N.Y., June 18, 1970. Hon. WILLIAM PROXMIRE, Chairman, Subcommittee on Financial Institutions, Committee on Banking and Currency, Washington, D.C.
DEAR SENATOR PROXMIRE: As requested in connection with our testimony on S. 3678 last week, we have attempted to rewrite Section 241 of Chapter 4 of Title II to limit the Secretary of the Treasury's rule-making authority.
The objections which other witnesses expressed with respect to the Section, I think, are valid and, of course, our testimony reflected the same view in that we suggested that the entire Chapter be deleted, although Secretary Rossides indicated that he would reconsider the matter and possibly come back with a different proposal, if one could be developed.
The best we have been able to do in responding to your request is to rewrite the Section so as to limit its application by taking into account our own reservations and those expressed by other witnesses. Our rewrite is enclosed.
Basically, it diffiers from the Section as it appears in the S. 3678 by making the matter discretionary with the Secretary rather than mandatory, by expressing legislatively the desire to avoid impeding or controlling the export or import of currency, etc., and by providing that the reports would be limited to such information as to which the reporting party had knowledge. The rewrite omits the language in the Bill which requires the report whenever a U.S. person "maintains any relationship, directly or indirectly," with a foreign institution. That language is very broad and would seem to be unnecessary, because the balance of the language would apply whenever a transaction actually took place. Finally, the Section would be amended so as to apply only to transactions involving $5,000 or more.
In other words, the rewrite narrows the scope of the Section considerably, but perhaps even as rewritten the Section would provide an effective tool which might assist in uncovering tax evasion or other fraudulent activity. (Section 242 would not be changed.)
In any event, I hope that the enclosed rewrite will be helpful to the Subcommittee. Very truly yours,
DONALD L. CALVIN.
§ 241. Records and reports required
The Secretary of the Treasury, having due regard for the need to avoid impeding or controlling the export or import of currency or other monetary instruments and having due regard also for the need to avoid burdening unreasonably persons who legitimately engage in transactions with foreign financial agencies, may by regulation require any resident or citizen of the United States, or person in the United States and doing business therein, who engages, on behalf of himself or another, in any transaction involving not les sthan $5,000 with a foreign financial agency to maintain records or to file reports, or both, setting forth such of the following information as is known to such person, in such form and in such detail, as the Secretary may require:
(1) The names and addresses of the parties to the transaction.
(2) The legal capacities in which the parties to the transaction are acting, and the names of the real parties in interest if one or more of the parties are not acting solely as principals.
(3) A description of the transaction including the amounts of money, credit, or other property involved.
Senator BENNETT. In the testimony of Mr. Morgenthau yesterday, it was implied that certain American banks or some American had established branches in these haven areas for the purpose of being able to supply the kind of service that is attached to a secret account, and by implication for the purpose of making it possible for them to become participants in illegal transactions.
Do you have any knowledge that that has and is going on on the part of American banks!
Mr. HAACK. I may have some suspicions, but they are completely undocumented or unproven.
Senator BENNETT. Can you provide the committee privately with any information which would help us resolve that problem?
Mr. HAACK. Sure.
Senator BENNETT. I don't think it should be brought out in the public session,
but it would be helpful if you could write us a memo. Senator PROXMIRE. Yes, I wish you would. Mr. HAACK. Yes. Senator PROXMIRE. It will go to the confidential file of the committee. Thank you very, very much for a fine job.
Our next witness is Mr. Frank J. Wilson, National Association of Securities Dealers.
STATEMENT OF FRANK J. WILSON, VICE PRESIDENT AND ASSOCI
ATE COUNSEL OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., ON BEHALF OF HENRI L. FROY, CHAIRMAN, FOREIGN COMMITTEE
Mr. WILSON. I am appearing here today to read Mr. Froy's statement. Mr. Froy had intended to be here, however, he is in Europe and he is ill.
Senator BENNETT. And you are Mr. Wilson?
Mr. WILSON. I am Mr. Wilson and I am vice president and associate general counsel of the NASD.
I would like to point out at this point that this is Mr. Froy's statement. I do not pretend to be expert in things foreign. However, hopefully, I will be able to answer any questions you have. Should I not be able to, we will supply complete answers for the record.
Senator PROXMIRE. That will be very satisfactory. If you want to abbreviate any part of this statement, it will be printed in full in the record. (The complete statement appears on p. 306.)
Mr. WILSON. With that in mind, then, Mr. Chairman, I think it might be well if we skipped over a page or two to the top of
page ceding two pages outline briefly the background of the association and the cooperation which it has previously had with the Treasury Department in connection with other acts, more particularly the Interest Equalization Tax Act.
The above background of the association and its activities is given for the purpose of emphasizing its regulatory character and to
3. The pre
demonstrate that it is just as interested as this committee in stopping unethical or illegal activity involving securities transactions which may take place by the utilization of secret bank accounts in foreign countries. In this connection, the association's board of governors recently approved an amendment to its free-riding regulations which will tighten and make more meaningful the restrictions upon the sale of hot stock to persons considered insiders in the securities industry by the utilization of such secret numbered accounts.
While the hot issue market is not currently with us it could return someday and these new regulations will have positive results in curtailing the distribution of hot stock improperly to insider persons. Such practices have long been prohibited by the association's rules but the nature of secret foreign bank accounts enabled circumvention thereof.
S. 3678, as I understand it, will impose certain detailed recordkeeping and reporting requirements upon banks and other financial institutions including broker-dealers and will impose reporting requirements in respect to transactions executed by individuals with foreign financial institutions, and the export and import of monetary instruments which include, in addition to coin and currency, such types of checks, bills, notes, bonds or other obligations or instruments as the Secretary of the Treasury may by regulation specify.
The bill would also amend the margin provisions of the Securities Exchange Act of 1934 to make the margin requirements applicable to the borrower as well as to the lender of funds for the purchase of securities on margin.
In these respects, the bill is substantially similar to the bill which was recently passed by the House of Representatives.
It goes further, however, in two very important respects insofar as the broker-dealer community is concerned. In this connection, I refer to the fact that it prevents U.S. broker-dealers from effecting transactions in U.S. securities on behalf of a foreign bank or broker unless the foreign bank or broker discloses the purpose and for whom it is acting or certifies that it is not acting for a U.S. citizen or resident.
Secondly, the bill would require U.S. citizens who place stock orders through foreign banks or brokers to give the foreign bank or broker permission to disclose the person's identity to the U.S. broker-dealer with whom the transaction is ultimately effected.
As explained by Senator Proxmire in his statement introducing S. 3678, the purposes of these provisions are to remove the veil of secrecy surrounding foreign stock transactions and enable foreign banks or brokers to disclose a U.S. citizen's identity without violating their own country's secrecy laws.
The association is fully aware of the problems with which the bill is attempting to deal and the abuses which it is designed to curb. The objectives of the bill are laudable and desirable and the association's foreign committee (indeed all of the officials of the association) is no less anxious than any other American citizen or taxpayer to deal with these abuses.
We are, therefore, strongly in favor of achieving the purposes and objectives of the bill though we disagree with some, but not all, of the methods spelled out in it to achieve them.
I think it might be appropriate to note at this point Senator, that this statement reflects the thinking of the members of the foreign
committee, both collectively and individually, all of whom are expert in the foreign markets and who do a business, a day-to-day business abroad.
Being directly involved by daily contact with foreign financial centers and foreign financial institutions, however, and, as such, a part of the intricate international financial mechanism and structure, the foreign committee believes it would be derelict in its duty if it failed to call to your attention the great dangers which it believes to be inherent in some of the proposals contained in S. 3678, especially those restricting a broker-dealer's right to do business with a foreign institution unless certain representations are made. Those provisions, in our opinion, have the potential to do irreparable damage to the mechanism through which international movements of capital are effected by the purchase and sale of American and foreign securities and the shifting of funds from place to place in response to changing conditions and the changing level of interest rates.
Gentlemen, we have a most serviceable international financial mechanism. It is constantly being improved and refined as witnessed by this year's adoption of regulations permitting the use of special drawing rights.
The international financial mechanism is a delicate and sensitive thing but it has permitted the shifting of large amounts of money, billions of dollars, from one center to another.
It has permitted the purchase and sale of all kinds of American and foreign securities here and abroad and it has allowed American companies to borrow large amounts of money in foreign financial centers to the relief of our balance of payments.
Also, the rest of the world purchased several billion dollars of American securities in 1968 and 1969 helping to overcome a sizable deterioration in our trade balance. All in all, these results have stimulated international trade and investment.
All of this was possible only because the rest of the world felt confident that there would never be any interference with the free transfer, movement or shipment of money and/or securities. Therein, in our opinion, lies the strength of the dollar despite our continuing balance-of-payments deficit.
The enactment of the referred to sections of this bill runs the risk of severely damaging this basic confidence in the dollar. In fact, this very proposal has already aroused misgivings abroad, contributing and adding to the already existing nervousness in regard to the future of our securities markets.
We are fully aware of the bill's intent in requiring statements from foreign institutions before a domestic broker-dealer can do business with them, but we believe these provisions will serve to undermine the confidence of foreign investors as to the liquidity of their investments in this country.
Foreign investors who have lived for years with foreign exchange regulations in countries run by dictators or with very weak currency would feel that there is no more protection for them and their funds in the United States than in their own countries. They would interpret such a measure as the first step in the direction of interference with the free flow of foreign currencies.
The existence of the abuses which the bill is designed to prevent was uncovered, at least in part, by the dramatic investigation of former U.S. Attorney for the Southern District of New York, Mr. Robert Morgenthau. Steps should certainly be taken to deal with them and the association is wholeheartedly and unequivocally in favor of attacking the problems in an effective and positive manner. I have already related a step which the association itself has taken in respect to an area of abuse which falls under its jurisdiction.
The foreign committee of the association, however, believes in all seriousness that it must caution the committee that the attempt to get at the tax evaders by impossing restrictions on the right to do business may actually cause such serious damage to our balance of payments as to be out of proportion to the potential recovery of funds and fines from the tax dodgers or the criminal elements.
Moreover, at this point at least, we are not at all sure how effective the proposals would actually be in preventing the abuses which they are intended to reach. I suggest, therefore, careful study to the overall effect of the proposals be given by the committee.
The foreign committee is also concerned with the additional recordkeeping and reporting requirements which could be imposed upon broker-dealers by certain provisions contained in the bill.
The committee feels that a more effective approach to the problem would be to set up a system of checking remittances into and out of the country such as was used during the war by the Federal Reserve Bank of New York.
The National Association of Securities Dealers is not unwilling to enact a rule directing brokers and dealers to make all payments to or received from any foreign financial institution through the intermediary of a designated recordkeeping institution and we suggest this approach as an alternative.
À designated recordkeeping institution could be a bank which qualifies as such pursuant to regulations promulgated by the Secretary of the Treasury.
Such an approach would eliminate the broker-dealer community from being possible carriers and would centralize the recordkeeping responsibility with designated recordkeeping institutions.
It seems to us that such a procedure would make enforcement more effective and that such records could more easily be inspected and individual transactions traced than if all broker-dealers were required to keep records, in addition to those already required to be kept.
Such a rule would have to exclude settlement of transactions concluded by broker-dealers between non-United States institutions of non-United Stated broker-dealers as those transactions do not come under the intent of the proposed bill.
The foreign committee believes that such a rule with the complementing policing activities of the Internal Revenue Service would act as a strong deterrent, close a lot of loopholes and achieve the purposes of the bill without damage to our balance of payments.
Also, I know you are aware of the fact that on May 12 of this year the Treasury Department announced that American taxpayers who keep bank accounts in foreign countries will be required to disclose that fact on their 1970 income tax returns.
The association is completely in favor of this requirement and I believe that it alone will have a strong deterrent effect because there will be many, otherwise willing to take a chance, who will have second