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States 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 United States citizen or resident. Secondly, the bill would require United States 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 United States broker/dealer with whom the transaction is ultimately effected. As explained by Senator Proximire 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 United States 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. 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.
We are fully aware of the bill's intent in requiring statements from foreign institutions before a domestic broker/dealer can do business 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 fructified and 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.
Gentlemen, we have a most serviceable international financial mechanism. It is constantly being improved and refined as witnessed 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 United States 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 nositive 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 imposing 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 record-keeping 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 thorugh the intermediary of a designated record-keeping institution and we suggest this approach as an alternative. A designated record-keeping institution could b ea 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 record-keeping responsibility with designated record-keeping institutions. It seems to us that such a procedure would make enforcement more effective and that such records would 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 or non-United States 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 damagto 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 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 record-keeping 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.
Thank you very much.
CABLE RECEIVED FROM MR. FROY
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 nationality 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 broker/ dealers 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 Euro dollar 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 home and not their's. This view was expressed to me not only by banks up to state bank levels, but by various interested government departments in these countries.
Senator PROXMIRE. I understand that the next scheduled witness is not available, and so we have one last witness, and we are delighted to welcome Mr. Robert W. Wilson—this is Wilson day before the Banking Committee of Wilson Investments, accompanied by Carl Shipley, a distinguished Washington resident and friend of the committee.
Mr. Wilson and Mr. Shipley, we are delighted to have both of you gentlemen, here.
STATEMENT OF ROBERT W. WILSON, ROBERT W. WILSON INVESTMENTS, NEW YORK, N.Y.; ACCOMPANIED BY CARL L. SHIPLEY
Mr. Wilson. I want to thank you very much for giving me this opportunity to testify today. I am a private investor who has had Swiss bank accounts for a number of years.
Senator ProxMIRE. May I just interrupt to say, Mr. Wilson, that your entire statement will be printed in full-it is a very detailed statement; you take your time—including the attachments.
Mr. WILSON. I have no intention of reading the statement, sir.
Senator PROXMIRE. For that reason we will make sure that it is preserved for the record and the entire statement will be printed and you proceed in your own way. (The full statement appears on p. 318.)
Mr. Wilson. I have been a professional investor and analyst in the securities business now for almost 18 years. I have, or my wife has had, Swiss bank accounts or other foreign bank accounts for almost 10 years. The main reason we have had these bank accounts is to avoid U.S. margin regulations. For that reason today I am going to confine my discussion to title III.
In principle, I approve the balance of the bill, but I do not know enough about it to comment on it. Furthermore, I am only going to discuss title III as it relates to American borrowers, because that part of the title which applies to foreign borrowers and foreign lenders, I think, is clearly unenforceable and, based upon previous testimony you have heard, clearly unsound.
What I hope to demonstrate is that nobody who has suggested title III should be passed—that nobody who has recommended title IIIhas presented any good reason for enacting it, and I hope also to review the harm which title III could create.
First of all, I want to make a clear distinction between the problems of secrecy and the problems of title III. It is perfectly legal for an American to borrow abroad on more favorable margin than in this country. There is no need for such an American to be secretive about it. I have not been secretive about it. I think we have to make a distinction between avoidance of laws, which is sanctioned in this country, and evasion, which is illegal. I, for example, can avoid income taxes by doing certain things—curtailing capital gains and investing in oil and things of that sort. We must make a distinction between the avoidance of a law and the evasion of a law, which involves tax evasion, insider trading, and the concealment of capital gains. There is no connection, I respectfully submit, between secrecy and the margin problems. One does not have to be secretive to borrow abroad. I haven't been for many years.
The House committee and the SEC suggested that title III could help against foreign takeover threats. They suggested that there have been certain cases where U.S. companies had been taken over with financing from foreign loans; that there is a danger that those foreign loans will be called in, that the borrower will default, and that anonymous and perhaps unsavory foreigners would get control of U.S. companies. With margin requirements affecting American borrowers this wouldn't be a problem-as it is claimed.
I think it is very easy to visualize circumstances where a foreigner would lend an American money within the requirements of U.S. margin laws and still the American could default and still the foreigner could take over an American company. It doesn't seem to me that the margin laws are the way to handle takeover problems. This is a very complex area that I think has to be treated in another way.
Therefore, I think the main argument for enacting title III really boils down to this. Margin regulations are a good thing. I agree on this, that margin regulations are a good thing, and I think most people agree. Therefore, the argument goes, if we can extend margin regulations, that is an even better thing. Therefore, there is a presumption that any American who is borrowing abroad is destabilizing our stock market, and therefore he should be controlled. This is the presumption that I want to rebut.
There is no factual evidence whatsoever on what Americans are borrowing abroad, what margin they use when they borrow abroad. We have absolutely no figures now. I haven't seen one number referred to in any of the previous testimony.
We will, if the rest of this bill goes through, have figures in a couple of years. Meanwhile, without any demonstrated need for this bill, without any evidence that American borrowers are indeed destabiliz. ing the U.S. markets, the suggestion is made that we should enact another law. Margin laws, as you know, are extremely complicated. Regulation T, which applies to broker/dealers, covers over 38 pages. It seems to me additional laws should not be enacted unless there is a demonstrated need for them, and there is not now sufficient data to show such a need.
I further submit that, when such data does become available in a couple of years under the secrecy law, it may very well show that Americans borrowings abroad are not destabilizing the stock marketthat they are doing the market more good than harm.
In the first place, most Swiss banks lend on 50-percent margin. To be sure, 50-percent margin is lower than the margin permitted in this country, which is now 65 percent. A while ago it was 80 percent. But it is not that much different from the margins in this country, which are often as low as 50 percent.
You have heard lurid examples of banks lending people money on 80-, 90-percent margin, but you know as well as I do that the only banks that get big are banks that make prudent loans. You have seen the market decline lately, and I think you must realize that a prudent lender would insist on a 50-percent margin.
Secondly, a number of banks now are avoiding loans to Americans that do not conform to our margin requirements.
Thirdly, there is not really very much of an inducement for unsophisticated investors to open Swiss bank accounts. For one reason, it is against the law for American brokers, bankers, or anyone else connected with collateral loans to introduce any American to a foreigner who gives them more advantageous lending than can be done in this country. It is clearly unlawful for an American to arrange more attractive credit than can be obtained in this country. So only the most sophisticated people are likely to be involved in foreign countries.
Let me talk for a moment about the damage that restrictions on this borrowing can do. I can talk about some hard facts now, that is, my own account, my own investment operation. If this law is enacted, it will severely curtail that operation, which I submit is good for the country. My operation is basically a hedged operation. What do I mean by a hedged operation? A hedged account is an account where I own stocks long and I also own them short. What do I mean by long and short? A long position is a position where you buy a stock, you hold it, and eventually you sell it. If it goes up, you make some money, and if it goes down, you lose some money. A short is just the reverse. You sell the stock before you buy it. So if it goes down, you make money,
, and if it goes up, you lose money. How can you sell a stock before you buy it? How can you sell it before you can get it?
The answer is that the broker borrows it from people who own it. The broker either borrows it from other of his customers, who have given that broker permission to lend it out, or he borrows it from investment trusts. There is a great financial advantage in investment trusts lending stocks out for short sales, and there is no risk to them.
Therefore, I am borrowing not strictly to inflate the market by buying stocks. I am borrowing in part to buy stocks, but in part also to sell stocks, so while I'm inflating the market buying, I am deflating the market at the same time by selling short. There is an offset.
This is a case where U.S. margin regulations have not dealt with the matter. The Federal Reserve Board requires the same margin requirements for short sales as long purchases. They make no distinction between a hedged account, such as mine, and any other account. That is why I go to Switzerland. I go to Switzerland to borrow money in order to sell stocks short.
Now what specific benefits does this have to the country? First of all, as I just mentioned, I think it is a stabilizing element in the market. I don't inflate the price of stocks when they are going up, and because of the profits I make on the short side when they are going