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thoughts before they would undertake another criminal violation by failure to disclose the existence of such an account or accounts.
In addition to favoring the IRS's requirement to disclose foreign accounts on income tax returns, the association wholeheartedly supports those provisions of the bill which would require reports to be filed by individuals who knowingly transport into or out of the United States currency and other monetary instruments which, as noted, would include bearer bonds and stock transferable by delivery.
We believe such requirements will have a strong deterrent effect. We also favor that provision of the bill which would require individuals to file reports of transactions with foreign institutions with the Securities and Exchange Commission.
In closing, I would like to make a point which may have escaped you.
The years 1969 and 1970 have brought serious losses to the securities industry and its investor clients here as well as abroad. People who have tried to avoid taxes by buying their securities abroad may have been doubly punished. Initially, they have lost a very large part of their money and, secondly, they have foreclosed the possibility of offsetting their losses against possible profits.
We seriously urge that your committee go no further than imposing the suggested recordkeeping requirements for banks, requiring reports of funds leaving or coming into this country and requiring reports by individuals effecting securities transactions with foreign financial institutions.
This approach has the virtue of avoiding the risk of creating a situation where foreigners become perturbed not only to the point of widespread selling of their American securities but of converting the dollar proceeds to boot.
I would like to read and ask that there be inserted in the record the language of a cable which I received from Mr. Froy yesterday afternoon, and I will read that and submit it for the record, if I may:
Major European banks have since a long time refused to open accounts for U.S. persons if their nationality is known to them. Frequently they do not know the na: tionality of their clients. For tax reasons their interest is limited to their clients' residence. Also, they are not always promptly informed of any change in their clients' residential stature.
Large institutions in Great Britain, France, Switzerland, Germany and Italy whom I visited during the last three weeks decided to reduce their business in U.S. securities to an absolute minimum should S. 3678 be enacted in its present form and are already advising their clients accordingly.
They do not wish to give any wrong information, but might be caught when receiving an order from a third party who may in turn, unknown to them, act for U.S. or partly U.S. interests.
They adhere strictly to their domestic laws, but do not want to come under U.S. jurisdiction. It was uniformly stated to me that this proposed bill if enacted will be a permanent deterrent to foreign banks, institutions and brokerdealers for buying U.S. securities or suggesting such purchases to their clients.
Countermeasures are already being discussed. These may affect or completely arrest the placing of U.S. dollar bonds abroad or it may lead to conversion of the Eurodollar holdings at an early date. One or both of these actions would be disastrous for our balance of payments.
There is a general feeling that income tax evasion problems are a U.S. responsibility at hime and ot theirs. This view was expressed to me not only by banks up to state bank levels but also by various interested government departments in these countries.
I submit that for the record, Mr. Chairman. (See p. 309.)
Senator PROXMIRE. Thank you very much, Mr. Wilson. As I understand it, to the extent that you feel these questions should be answered
by Mr. Froy, you will simply deter them, and then when your remarks are corrected, you can answer them in any way you wish.
Mr. WILSON. Yes.
Senator BENNETT. Mr. Wilson, it seems to me Mr. Froy's testimony would suggest two alternatives:
(1) Set up a system of checking remittances in and out of the country, and
(2) To set up a system under which a recordkeeping institution could act as the central point to collect the information.
Those are two different alternatives; are they not?
Mr. Wilson. It is essentially the same. I believe the recordkeeping institution would be the institution through which the remittances would flow, and I believe the suggestion is based primarily upon the fact that most securities and funds, which are presently handled by U.S. brokers, in respect to foreign institutions presently do go through domestic banking channels on their journey abroad.
Senator BENNETT. Your statement at the beginning makes a very eloquent plea for the preservation of the free flow of money and securities in international channels. If this were set up officially, would this be interpreted abroad as the first step in a restriction of this free flow?
Mr. WILSON. I think not; I think the foreign institutions, insofar as I am informed, do not oppose the imposition of recordkeeping requirements in this country. I think what they do oppose and object to is the imposition of requirements upon them as a result of requirements placed upon U.S. citizens, to wit: A requirement that they certify a given transaction is not on behalf of a U.S. citizen. I think they fear that if they make a mistake and unknowingly so certify in respect to a person who is a U.S. person and that person is subsequently discovered, that there might be some overlapping or resulting effect on that particular institution, perhaps unwarranted, perhaps to the extent of restricting further transactions.
I will concede this type of fear probably is unwarranted, but it is apparently real.
Senator BENNETT. You heard Mr. Haack's testimony and the succeeding discussion about the developing markets for American securities in Europe. Do you have any comment to make on that?
Mr. Wilson. As to the effect of these provisions on the developing markets in Europe? I think it would be Mr. Froy's strong position, and I believe the telegram would so indicate, that he feels it would have a detrimental effect on the business of U.S. broker/dealers with foreign institutions.
Senator BENNETT. That was not quite my question. I have the message from Mr. Froy's telegram very clearly. But Mr. Haack suggested that the foreign exchanges are building up subsidiary markets for the buying and selling of American securities that never reach the American markets. Do you have any
comment on that? Mr. Wilson. Yes; I am sorry, I missed your question. I
. I would like to defer on that to the Foreign Committee. I think it can supply some very good comments in that respect.
Senator BENNETT. Thank you very much.
Senator PROXMIRE. Yesterday, Mr. Wilson, we heard testimony that U.S. citizens frequently have arrangements with their brokers whereby they can call the broker to execute a securities transaction in the name of their secret foreign bank account. The broker subsequently calls the foreign bank to complete the transaction. Is this procedure a violation of NĂSD rules and regulations?
Mr. WILSON. I should think it would be.
Senator PROXMIRE. Has the NASD detected any cases where this type of arrangement has been going on?
Mr. WILSON. I know of no case where it has uncovered such a situation. I do not say it does not exist.
Senator PROXMIRE. What penalties or sanctions would the NASD impose if it detected a broker accepting an order under these circumstances?
Mr. Wilson. I can only answer that by giving the outside limits of the penalties which can be imposed by the Association. The Association can impose fines, suspensions from membership for a period of time or expulsion from membership. I think it is fair to say that expulsion from membership or a revocation of an individual's registration is tantamount to putting him out of business.
Senator PROXMIRE. What do you think of this situation? This is the next witness, what he has to say: "As mentioned above, on the short side the Swiss bank must carry a short account with a broker in the United States.
“Here again let me emphasize that the account is carried in the name of the Swiss bank. Typically, the American broker will accept orders from me followed by cable confirmation of the Swiss bank. Here, however, since short sales are involved, there are no deliveries," and so forth.
“Let me emphasize that the account is carried in the name of the Swiss bank. Typically, the American broker will accept orders from me followed by cable confirmation by the Swiss bank."
Would you say that would constitute a violation?
Mr. Wilson. I think it would depend on how the broker carried it on his books. If he reflected all of those facts on his books, I do not think there would be a violation. If the purpose of that arrangement was not to disclose his identity and the broker/dealer assisted him in doing that and did not properly reflect the purchaser whom he knew about on his books, I should think it would be a violation, and I feel certain it would
a be construed as such.
Senator PROXMIRE. You indicate you are worried about greater disclosure on foreign transactions that would impair foreign confidence. Isn't the opposite more likely? If we permit our markets to be manipulated through secret foreign bank accounts, would not foreign investors lose confidence in these markets?
Mr. Wilson. I think to the extent that any market is manipulated and there is a detrimental effect on the market as a whole, there would result some loss of confidence.
Senator PROXMIRE. Mr. Haack testified to the destabilizing force of violating our margin requirements by using foreign sources for funds.
That is one element. We have a big mutual fund which recently had to liquidate substantially. Many people feel that was a factor in the recent sharp drop in the stock market.
It is conceivable that on the kind of large scale that these foreign investors deal it could result in a market manipulation that would tend to destroy foreign confidence, is it not?
Mr. WILSON. As I say, if there is manipulation, to some degree, there is a destruction of confidence. However, with respect to whether that situation would ultimately result in the destruction of confidence or whether some of the provisions in this bill would, I would have to defer to Mr. Froy who has within the last 3 weeks spoken directly with a number of institutions in five countries, and I would think that his comments perhaps at a later date and in greater detail might be very appropriate for this committee.
Senator PROXMIRE. It seems to me I could argue that failure to pass this legislation would have as destabilizing an effect or adverse effect as the warning that you gave us on the reactions in Europe if we pass this legislation.
Mr. Wilson. I do not think that the Association or Mr. Froy or the Foreign Committee would say do not pass this legislation. I think they are saying do not impose the requirement that the foreign bank have to certify that his customer is not a U.S. person. I think the foreign banks feel this is imposing upon them U.S. law.
Senator PROXMIRE. The figures for 1968 indicate that $9 billion in stock transactions originated in Switzerland. How much of that is $9 billion in foreign money comes from U.S. citizens?
Mr. WILSON. I have no idea, Senator.
Mr. Wilson. I have no idea personally. I would attempt to supply it for the record if I can get such a figure.
Senator PROXMIRE. Don't you think you ought to have some kind of tools such as this legislation provides so that we could have some notion?
Mr. Wilson. Yes, sir.
Senator PROXMIRE. Some broker/dealers seem to do an inordinately high volume of their business with Swiss banks. According to a survey we conducted, one broker does about 85 percent of its business with Swiss banks. Do you see anything unusual or suspicious about this?
Mr. Wilson. In and of itself, no. That may be the nature of that particular broker/dealer's business. I do not know the type of business he does or any of the other details. But in and of itself I would have to say no.
Senator PROXMIRE. You say in and of itself; it may not be suspicious, but in and of itself you say this would not constitute an indictment, rather it may be a red flag for further inquiry?
Mr. Wilson. Perhaps a red flag, but in and of itself, I'd have to say no. Senator PROXMIRE. Thank you very, very much, (The prepared statement and cablegram of Mr. Froy follows:)
STATEMENT OF HENRI L. FROY, CHAIRMAN, FOREIGN COMMITTEE, NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. My name is Henri L. Froy. I am Chairman of the Foreign Committee of the National Association of Securities Dealers, Inc. and a general partner in
Abraham & Co., a broker in domestic and foreign securities, and a member of the New York Stock Exchange and the Association. The remarks contained herein reflect views of the Foreign Committee and represent the position of the Association in respect to S. 3678. Initially, I would like to express the Association's appreciation for being extended this opportunity to appear before your Committee and offer these comments.
The National Association of Securities Dealers, Inc. is a nationwide, selfregulatory organization created as a result of an act of Congress and is composed of 4,385 broker/dealer members. It also has registered with it, and has supervisory and regulatory responsibility for about 178,000 salesmen and management personnel employed by those broker/dealers. It is important to emphasize that the Association is a regulatory body rather than a trade association and this Committee can be assured that the Association willingly and aggressively asserts that distinction and accepts all of the duties and obligations and asserts all of the powers inherent in its designation as such. Its purpose is to protect the public interest and it does this by enforcing standards of ethical conduct on its members and those registered with it.
By way of background, the Association was organized in 1938 and it receives all its authority from the Maloney Act which was enacted in that year for the purpose of completing the federal regulatory scheme in the securities industry by providing a regulatory mechanism over the ethical standards of broker/ dealers in the over-the-counter securities market. That area was not previously the subject of close regulation. The Association is, therefore, an integral part of the overall system of federal securities regulation.
The Association has testified frequently before committees of the United States Senate and the House of Representatives in respect to legislation affecting the securities industry, including the Interest Equalization Tax Act in connection with which the Foreign Committee of the Association was particularly interested and which was subjected to close study by it. The Association, subsequently, has cooperated closely with the United States Treasury Department and offered its advice and assistance with reference to enforcement of certain of the provisions of that Act. Similarly, the Association has worked closely with the Treasury Department on technical problems in connection with proposed legislation especially in connection with the extension of that Act in 1969 when the Association imposed a requirement upon its members to continue to adhere to its provisions during the interim if the extension act was not finally approved before the expiration date of the earlier Act. I am sure Treasury officials will corroborate that our counsel, our enforcement and our supervision has been helpful and effective.
The above background of the Association and its activities is given for the purpose of emphasizing its regulatory character and to demonstrate that it is just as interested as this Committee in stopping unethical or illegal activity involving 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 record-keeping 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 United States broker/dealers from effecting transactions in United