Senator PROXMIRE. In your judgment, does this legislation go that far, would it inhibit legitimate investment by foreigners?

Mr. BUDGE. I really don't feel qualified to answer, because I don't know to what extent it would inhibit investors from abroad.

Senator PROXMIRE. If you have any feeling on that, any specific proposals that could correct that kind of inhibition, I would appreciate getting it because we would like certainly to eliminate that just as you would.

Ünder title IV of S. 3678, the Senate bill goes beyond the House bill by prohibiting U.S. brokers from accepting securities orders from foreign banks unless the foreign bank discloses the party for whom it is acting or certifies it is not acting for a U.S. citizen or resident.

What impact will this provision have on the enforcement of our securities laws?

Mr. BUDGE. I think that would be very helpful, Mr. Chairman. I think something else that the committee might consider is expanding that disclaimer so that the foreign entity would have to disclaim not only that the transaction is not by an American citizen but it is not violative of the laws of the United States, including, of course, the margin requirements.

Senator PROXMIRE. It can be argued that such a requirement is a totally new and unjustified attempt to regulate foreign banks. Do you think it is unjustified or within precedence for this type of a require

ment?

Mr. BUDGE. In the field of foreign affairs, Mr. Chairman, I think I would prefer to defer to other agencies of the Government.

Senator PROXMIRE. Another possible objection to title IV is that it may reduce foreign investment in the United States, to which you have alluded. In your statement, you have emphasized the positive impact of such legislation in the sense that it promotes greater foreign confidence in the integrity of our securities market.

On balance, do you think title IV would have a beneficial or an adverse effect on foreign investment flows?

Mr. BUDGE. I would again wish to defer that to Congress and the other agencies of the Government.

Senator PROXMIRE. What other agencies? We have great confidence in you and your agency. You are an expert in this field.

Mr. BUDGE. Again, I just don't know to what extent that would inhibit participation by foreigners in our markets.

Senator PROXMIRE. Would you refer to the Treasury and their judgment?

Mr. BUDGE. That would be one of the agencies, certainly, probably the main one in the executive branch of the Government.

Senator PROXMIRE. Can you assess the positive impact of greater confidence that this would engender?

Mr. BUDGE. I think, Senator, anything which can be done to emphasize and reemphasize the stability, the fairness of the American marketplace, should be done, whether it is with our own citizens or with persons abroad, so that we can point to our markets as being the finest markets in the world, which they are, and the marketplaces of the world which come the closest to providng an honest product at an honest price.

Anything that can be done to enhance that image I think the Commission would wholeheartedly support.

Senator PROXMIRE. Title III of S. 3678 extends penalties for violating margin requirements to the borrower as well as to the lender. Do you support this?

Mr. BUDGE. I should say we do. We are a five-man commission.

Senator PROXMIRE. We had some very interesting and useful testimony from Mr. Seymour earlier in which he had the distinct feeling that the ability of those who used foreign bank accounts to evade margin requirements could have an unsettling effect on the market. Would you subscribe to this view?

Mr. BUDGE. I would.

Senator PROXMIRE. And it could have a significantly unsettling effect in your view, is that correct?

Mr. BUDGE. Yes, I think so.

Senator PROXMIRE. It has been suggested that the penalties apply to the borrower only insofar as he borrows abroad. If he borrows domestically, the penalties would only apply to the lender as they do now under the existing law.

Can you comment on this proposed modification of S. 3678?

Mr. BUDGE. I have not specifically considered that, Mr. Chairman, nor has the Commission. I see no reason for the distinction, no apparent reason at the moment.

Senator PROXMIRE. Wouldn't it be easier to enforce the domestic law if you could get at the borrower as well as the lender?

Mr. BUDGE. I am sure that it would be.

Senator PROXMIRE. The House bill extends penalties to the borrower for violating the margin requirements if the borrower makes a "material misrepresentation" to the lender concerning the purpose of the loan.

Under the Senate bill, a borrower is guilty only if he willfully and knowingly violates the margin requirements. Can you comment on which of these two approaches you would prefer?

Mr. BUDGE. I think we would prefer the disclosure approach which is in the former.

Senator PROXMIRE. Which is the former, the House bill version?
Mr. BUDGE. Yes.

Senator PROXMIRE. How frequently are foreign bank accounts involving in cases involving manipulation of individual securities?

Mr. BUDGE. Well, we just don't know the frequency. We suspect that it happens rather frequently, but we are unable to pursue our investigation to the length to actually prove it in a lot of cases.

Senator PROXMIRE. How about your computer kickouts, does that give any indication how frequently these situations reflect foreign holdings?

Mr. BUDGE. We can determine that something has happened from the tolerances in the computer and that it is something we would like to look into, but as we go down the line to try to find out where the securities went and who got the money, if it runs into a foreign intermediary, that is the end of the trail.

Senator PROXMIRE. I understand that, but I wondered if the SEC had made any study of the ones where there are irregularities in which the computer indicates there is something suspicious that should be investigated, how often do you run into foreign holdings?

Mr. BUDGE. If I may, I would defer to Mr. Pollack, who is the director of our Division of Trading and Markets, as to that.

Mr. POLLACK. We will find some foreign accounts in many of these cases. The problem is you don't know whether there is anything irregular because you don't have access to the evidence to determine that. But we do find, as the statement indicates, that in the surveillance operation we will run into foreign accounts in a number of instances.

Senator PROXMIRE. So, of the small fraction of cases which the computer would indicate merit further investigation, a significant number of them do involve foreign holdings?

Mr. POLLACK. Yes.

Senator PROXMIRE. If the SEC suspects a stock is being manipulated and if on further investigation it learns that the orders are originating from a foreign bank in a country with strict bank secrecy laws, what can the SEC do?

Mr. POLLACK. Well, sometimes we are able through other channels to get some indication of the indicated ownership of the account, but more frequently we are unable to determine that, and so we are forestalled in completing the inquiry.

Senator PROXMIRE. Your statement mentions four recent corporate takeover attempts involving the use of foreign banks. In how many of these cases was IOS involved?

Mr. BUDGE. It is my impression, Mr. Chairman, that IOS was involved in two of those attempts.

Senator PROXMIRE. How does a firm such as Liquidonics go about getting financing from a Swiss bank to take over UMC? Who arranges the loan?

Mr. BUDGE. Mr. Pollack was involved in that investigation. I would defer to him again, Mr. Chairman.

Mr. POLLACK. We, of course, don't know the exact banking procedures, but generally somebody connected with the borrower will go to Europe and arrange through contacts there for financing from European institutions.

Senator PROXMIRE. You say they go to Europe to arrange for financing through European institutions. In that case they don't have to use Swiss banks, it would be the European institutions providing the financing in the sense that the money comes from Europeans. Mr. BUDGE. We assume it does. We don't know.

Senator PROXMIRE. It is a pretty safe assumption, it seems to me, it doesn't come from Switzerland. There is a little country with 2 or 3 million people, small incomes, and they buy billions and billions of dollars of securities in this country each year. Isn't it a pretty good assumption that much of this is coming from Americans who are investing in those Swiss banks?

Mr. POLLACK. We assume that some of it may well come from here. Of course, Switzerland has always been the international banking center of the European continent, and there is no question that the funds moving through the Swiss banking system do not come from that source alone. They don't have those resources. Whether the funds come from European sources or Asian sources or to the extent they come from the United States is something we do not know at this particular point.

Senator PROXMIRE. If they came from London or from Paris or from Italy or some other country, Germany, why wouldn't they use their own institutions, in which case there would be disclosure in those countries, would there not?

Mr. POLLACK. In some of these instances they might. Maybe because the way the group is put together, they will move it through Swiss banking channels for reasons of their own which we can only speculate upon.

Senator PROXMIRE. With respect to the Liquidonics takeover of UMC, who owns UMC now?

Mr. POLLACK. It is now owned by a Luxembourg subsidiary of a French bank, as I recall.

Senator PROXMIRE. Does this affiliate own the stock for itself or is it acting for another party?

Mr. POLLACK. As far as we know, we can only rely on what has been filed with us, it is purportedly owned by the Luxembourg subsidiary. Senator PROXMIRE. There is no way you can check that out? Mr. POLLACK. Not at the present time.

Senator PROXMIRE. You can't go any further?

Mr. POLLACK. No, sir. We might be able from individuals involved if they are here, but we cannot go beyond the filing evidence that we

have on record with us.

Senator PROXMIRE. Senator Bennett ?

Senator BENNETT. Thank you, Mr. Chairman.

Mr. Chairman, I wonder if under the provisions of either of the two bills before us we might not be discriminating against American citizens in that we restrict their activities whereas there are no restrictions on the activities of foreign investors? Would you like to comment on that?

Mr. BUDGE. I think, Senator, there would be restrictions on certainly some of the classes of foreign investors. I don't know that we could ever remove this discrimination entirely. It exists in a lot of the areas of the securities laws today.

Certainly we would not want to permit foreigners to do things with relation to taking over corporations which we would not permit Americans to do. But I don't know that we can go as far with the foreign investor as we can with the American investor.

Senator BENNETT. What are the current restrictions on foreign investors in general?

Mr. BUDGE. I was speaking of the provisions of this bill which would place restrictions upon them. I have indicated at least one area where we think the disclosure of the foreign institution should be amplified. Senator BENNETT. That is all I have, Mr. Chairman.

Senator PROXMIRE. Thank you, Chairman Budge very much for an excellent job and very responsive and helpful.

(The full statement of Chairman Budge follows:)

STATEMENT OF HAMER H. BUDGE, CHAIRMAN, SECURITIES AND EXCHANGE

COMMISSION

We are pleased to have been invited to participate here today in the matter before the Committee. We hope that our testimony will be of assistance to it in considering proposals to require that certain records be kept by banks, that certain transactions in United States currency be reported, that the margin provisions be broadened and that certain disclosure or certification be made as to transactions involving foreign financial agencies. Since the bill concerning which we have asked to testify, S. 3678, is quite similar to H. 15073, which was recently passed by the House of Representatives, our testimony before this Committee will necessarily be quite similar to that which we have given previously before the House Committee on Banking and Currency.

Since this proposed legislation will impose certain reporting requirements on Americans engaging in foreign financial transactions, we wish to clearly emphasize at the outset, as we did before the House Committee on Banking and Currency, that the Commission welcomes participation in the American economy by legitimate foreign investors. The Commission well realizes the benefits to the economy from the inflow of capital from abroad. At the same time we feel a responsibility to such foreign investors to enforce high standards of conduct in our securities markets so that they, as well as American investors, may invest their funds in an informed manner and with confidence in the integrity of our markets.

By way of background, we should first point out that many brokerage firms in the United States number among their clients foreign banks, as well as trusts and other financial agencies, formed in a number of the smaller countries in Western Europe and even closer to home, in the Caribbean area and elsewhere in North America. These entities engage in transactions in the United States, on our exchanges and in the over-the-counter market in securities of U.S. corporations through American broker-dealers registered as such with the Commission and, to a lesser extent, through American banks.

The volume of securities business done in this country by foreigners, including foreign banks and other financial agencies, is quite large. In the calendar year 1969, on all markets in the United States, foreigners made total purchasers of nearly 12.5 billion dollars of common stock and total sales of just under 11 billion dollars, with a total net investment of almost 1.5 billion dollars. Such purchases and sales were equivalent to almost 9% of comparable New York Stock Exchange volume for 1969. In the first quarter of 1970 there were total purchases of 2.4 billion dollars and total sales of 2.5 billion with sales of common stocks by foreigners exceeding their purchases by 98 million dollars.

Unlike other customers of American brokerage firms or banks, however, it is usually not possible to find out the names and addresses of the persons for whose beneficial interests transactions have been effected by foreign banks and other financial institutions. Nevertheless, on occasion, as the result of imaginative investigative work and fortuitous circumstances, we have been able to obtain sufficient evidence to establish the identity of such persons. Not surprisingly, in a number of these situations the persons involved in the questionable activities have turned out to be Americans. We understand that it is not even necessary for an American citizen to actually go to certain foreign countries to establish an account with a bank or other financial agency in those countries. Thus, the secrecy laws of a foreign country can be used by an American, who has never been to that country, to mask illegal activities taking place in the United States in the securities of American corporations.

Over the years the veil of secrecy drawn over all types of transactions by these foreign banks and other similar entities has been a substantial impediment to the Commission and, we believe, other agencies of our government in carrying out the enforcement and regulatory duties for which they are responsible. This has occurred in a number of important cases involving violations of the federal securities laws. The main problems that we have with regard to foreign banks are, first, that being outside of the United States they are beyond the effective range of our subpoenas and, in addition, they may also operate under laws providing broad secrecy over the affairs of their clients, regardless of who these clients are and where they reside or operate.

A growing number of stock market operators and others have now become sophisticated enough to take advantage of these foreign jurisdictions and secrecy laws in connection with their securities transactions and market operations in the United States by channeling their purchase and sale transactions through foreign intermediaries and by collecting proceeds from their unlawful activities in accounts at such entities.

The basic method by which we traditionally prove securities law violations is by tracing the flow of stock from its original issuance through the promoters and out to the general public and then by tracing the proceeds from each sale back from the public to the promoters. When either the distribution of the stock or the transmission of the proceeds are channeled through a foreign intermediary it becomes very difficult, if not impossible, for us to acquire competent evidence establishing the identity of the persons who have beneficial interests in the stock sold and the proceeds received.

Foreign financial agencies may, of course, also be used to mask other activities that are violative of the federal securities laws, such as violations of the margin provisions, violations of the restrictive provisions relating to short