Revenue sources

One of the company's principal sources of income is the sale and management of mutual funds. The largest mutual funds managed by the company-The Fund of Funds, Limited ("FOF"), IIT-International Investment Trust (IIT), and 10S Venture Fund (International) N.V. ("Venture Fund International")—are sold internationally except in the United States and a few other countries where they are not allowed to be sold. The company has recently developed "national" mutual funds, such as Fonditalia (Italy) and Investors Fonds (West Germany). These funds are designed so that the company can take every advantage available from local laws, especially as related to taxes.

In general, the company has voting or management control of the mutual funds which it sells and manages, thereby giving the company the ability to revise management and other contractual arrangements including the amount of fees rendered between itself and the funds, subject in some instances to approval by governmental authority and in some other instances, approval by fund shareholders.

The company's banking, real estate and insurance subsidiaries conduct some activities which are unrelated to mutual funds, but the services offered to the public by each of these subsidiaries are promoted principally through the company's sales organization. In addition, the company's banking and insurance subsidiaries derive a substantial part of their revenue through activities which directly support, or are directly supported by, the company's mutual fund activities.

The banking group consists of banks in the Bahamas, Switzerland, Germany, Italy, and Luxemburg. This group offers customary European commercial banking services and much of its revenues are generated by lending deposited funds. The banks also conduct investment banking activities which include the underwriting of Eurodollar securities. A finance company subsidiary derives revenues from loans to finance the purchase and carrying of client investments in company-managed mutual funds, as do some of the subsidiary banks. Some members of the banking group derive part of their revenue from the conversion of currencies for the accounts of clients investing in company-managed mutual funds and from soliciting dealer fees in various tender and exchange offers for securities held by such funds. In countries where the law and stock exchange regulations permit, members of the banking group participate in brokerage commissions from transactions by the mutual funds.

Income from real estate activities has been principally earned in connection with sales of condominium apartments, in various stages of construction, located in Spain, Florida, and Mexico.

Revenues from life insurance and related operations consist primarily of premium income from Dover Plan equity linked life insurance policies (where premiums are principally allocated to a portfolio of mutual funds and other securities managed by the company) and premium income on program completion insurance which is marketed by the sales organization as part of ten- or fifteenyear investment programs in shares of mutual funds.

The activities of the company's principal operational groups have interrelationships, which contribute substantially to the net income of the banking, real estate and insurance groups. The following table gives the percentage contribution of each group to the consolidated net income of the company for the five years ending December 31, 1968. This table demonstrates the banking and financial groups' increasing growth and increasing contributions to total earnings.

Note: The consolidated net income of IOS, Ltd., and subsidiaries increased from $1,683,000 in calendar year 1964 to $14,369,000 in calendar year 1968. For the 6 months ended June 30, 1969, consolidated net income totaled $9,521,000, an increase of $5,066,000 over consolidated net income of $5,455,000 for the 6 months ended June 30, 1968. Consolidated retained earnings increased from $2,536,000 at Dec. 31, 1964, to $35,280,000 at Dec. 31, 1968. For the 6 months ended June 30, 1969, the retained earnings balance at the end of the period was $43,560,000, an increase of $25,139,000 over the balance of $18,421,000 at the end of the 6-month period ended June 30, 1968.

Taxes

The taxation laws of the various countries appear to have a large influence on the pattern of growth and activities of the company and its subsidiaries. Because the company is operated when possible in countries with minimum regulations and taxes, the company and its subsidiaries have paid taxes at a very low rate.

The company, as a non-resident Canadian company, pays no income taxes in Canada and it has a very favorable tax agreement with the Swiss Federal and Cantonal governments whereby the taxes paid there are minimal. Certain subsidiaries in the Bahamas pay no taxes. Although IOS had about $1.2 billion of investments in the United States at August 21, 1969, it pays almost no income taxes in this country. The following table demonstrates the small amount of taxes the company pays in relation to its earned income.

The company provides management services to its mutual funds in three groups:

(1) Through subsidiaries of Investors Overseas Management Limited (“IOS Management"), an approximately 77%-owned subsidiary of the company.

(2) Through management subsidiaries of the company which IOS Management has a right to acquire in the future.

(3) Through other subsidiaries of the company.

IOS Management owns the respective management companies which manage the following: FOF, IIT, Venture Fund International, Fonditalia, IOS Regent Fund Ltd. ("Regent Fund"), Investors Funds and Investment Properties International, Limited ("IPI"). Management fees charged directly to the funds range from 1/24th of 1% per month of average total net assets (1⁄2 of 1% per annum) in the case of Regent Fund to 10% of quarterly net income and realized and unrealized capital gains, subject to a minimum monthly fee of 1/12th of 1% of net assets (1% per annum), in the case of Venture Fund International. The company receives a sales charge of up to 1% when these managed funds purchase shares in other company-controlled funds. The company also receives management fee income from certain proprietary funds for rendering investment advice to particular fund sub-accounts. There is little regulation regarding the payment of these fees.

The mutual funds also pay the charges directly related to their investment portfolios, principally brokerage commissions. Since these funds do not come under the Securities and Exchange Commission regulations, a portion of total brokerage commissions paid is given up to the bank subsidiaries of the company. Direct portfolio management is centered in the Company's Geneva-based Investment Management Division which at June 30, 1969, managed approximately 60% of the assets of Company-managed mutual funds.

Indirect portfolio management results from services rendered by approximately 30 sub-advisors, located in the United States, the Bahamas, the United Kingdom and Italy, who have been retained to render specific portfolio advice concerning selected portions of the investment portfolios of FOF, The Fund of Funds Sterling Limited ("FOF Sterling"), Fonditalia, Regent Fund, IOS Venture Fund Ltd. ("Venture Fund"), Venture Fund International and the direct investment portion of The Equity Unit Account of The Dover Plan ("The Equity Unit Account”).

Funds managed by IOS

The following table presents information concerning the open-end mutual funds distributed and managed by IOS:

Aug. 31, 1969

Total net assets of mutual funds under management. $1, 821, 754, 000 Fund (year organized or acquired) The Fund of Funds, Ltd. (1962)

Total

IIT, an International Investment Trust (1962)

Total

676, 164, 000

623, 195, 000

IOS Venture Fund (International) N.V. (1969)

Total

137, 198, 000

Svenska Internationella Invertmentfonden ("Interfond") (1969)

Total

Rothchild-Expansion (1969).

1 Not available.

SEC-IOS litigation

874, 000 (1)

In early 1965, the Securities and Exchange Commission began an investigation of IOS to (1) determine the impact of its activities on registered mutual funds and on the securities markets and (2) to determine whether it or any of its subsidiaries had violated the Federal Securities laws. Litigation by SEC against IOS resulted from this investigation, and culminated in a settlement under which IOS agreed to cease all operations in the United States which come under the regulation of SEC. This included sales to United States citizens anywhere. The details of the investigation, the litigation, and the settlement are discussed in the SEC testimony before this Committee.

IOS investments in United States companies

Securities and Exchange Commission personnel furnished the Banking and Currency Committee with a listing of IOS and IOS-affiliated company investments at September 25, 1969. The list shows the combined stock, bond, and note holdings of Fund of Funds Proprietary Funds, Ltd., International Investment Trust Fund, Fonditalia, IOS Venture Fund of Canada, IOS International Ventures Fund, and Regents Funds.

Our analysis of the information in the list indicated that IOS and its affiliates held stock, bond, or note interests in a total of about 522 companies (domestic and foreign) at September 25, 1969, and their combined holdings represented 4 percent or more of the oustanding issues of such holdings in about 62 of the 522 companies. About 464 of the 522 companies were United States companies and the IOS and affiliated company combined holdings represented 4 percent or more of the oustanding issues of such holdings in about 50 of the 464 United States companies.

In preparing this paper concerning Investors Overseas Services we have tried to be responsive to Chairman Patman's letter of November 7, 1969 to Chairman Budge, which stated:

"We would like background information on how this organization was formed and the circumstances of the agreement whereby Overseas Investors Services removed itself from SEC jurisdiction. We are interested in the inability of the Commission to examine the books and records of IOS because of the latter's

argument that such disclosure would be a violation of foreign law. We are particularly interested in this organization's activities in this country, including the number and amount of its acquisitions and any general patterns which may have developed therefrom. This would include its influence in the management of American companies in which it has acquired an interest.

The Investigation

In early 1965, the Commission's staff first became aware of the very substantial positions which had been acquired by The Fund of Funds, Ltd. ("FOF") in the shares of several registered investment companies.1 FOF was incorporated in Canada but its securities are not sold there. It was operated from Geneva by I.O.S., Ltd. (S.A.) ("IOS"), a Panama company also controlled from Geneva by a group of expatriate Americans headed by Bernard Cornfeld and Edward M. Cowett. Because of the size of FOF's holdings and the apparent scope of the activities of both FOF and IOS, in early 1965 the Commission directed the staff to conduct an investigation of IOS to determine (1) the impact of the activities of FOF and IOS on registered mutual funds and on the securities markets and (2) to determine whether FOF, IOS, or any of its other subsidiaries violated the Federal Securities Laws.

At the time the investigation was ordered, IOS was a registered broker-dealer. It had registered in 1960 because its principal business then involved the purchase of securities through the use of the jurisdictional means and the sale of such securities to Americans overseas. As a registered broker-dealer, IOS was required to keep copies of its books and records in the United States, or file an undertaking to produce any or all of its books and records in Washington, D.C. on demand by the Commission. It had filed such an undertaking and consequently was permitted to keep its records and books in Geneva.

The staff's investigation uncovered a number of violations of the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Securities Exchange Act") and the Investment Company Act of 1940 ("Investment Company Act").

1. IOS had sold interests in FOF within the jurisdiction of the United States in violation of the registration requirements of both the Securities Act and the Investment Company Act. The prospectuses and selling literature used by IOS to describe FOF contained statements which fell far short of the disclosure standards of the Securities Act and the Securities Exchange Act.

2. The investigation revealed that IOS was causing registered investment companies to directly execute transactions for their portfolios with certain broker-leaders, or directing such companies to require that their own executing broker-dealers give up a portion of their brokerage commissions to the brokerdealers designed by IOS. IOS or its affiliated persons apparently were able to benefit from such brokerage commissions, although as discussed later, we were stymied in tracing the flow of the monies, which over a relatively short period of time aggregated several millions of dollars, by the secrecy laws of the Bahamas. IOS also caused the registered investment companies involved to inadequately describe such arrangements in their prospectuses.

3. The investigations also disclosed that IOS had violated Section 17 (d) of the Investment Company Act in that an investment company under its control engaged in a transaction with certain registered investment companies in which FOF had substantial stock holdings, in violation of the Act.

During the investigation, we also conducted an inspection of a wholly-owned subsidiary of IOS, Investors Continental Services, Ltd. ("ICS"), also a registered broker-dealer, at the principal office of ICS in New York City. During that inspection, the staff found, reviewed and then requested ICS to furnish a copy of a certain letter written by Mr. Cowett to another employee of the IOS organization in Geneva with a copy sent to Mr. Cornfeld. Although the letter was not turned over and apparently destroyed, a hand-written copy of the letter had been made by the Commission's staff when they were in ICS' offices during the inspection. In that letter,2 Mr. Cowett stated in part:

"As you are probably aware, the ICS files are always open to complete examination by the NASD or SEC. One improper paper in the file, if discovered, could lead to a complete investigation of the entire workings of ICS. Such an examination would include, in all probability, a review of all correspondence coming into the office over a protracted period. Since the correspondence in any period of three

1 A schedule showing the size of FOF's reported holdings at June 30, 1966 is attached as Exhibit A.

2 The full text is set forth in the Commission's order for public proceedings of February 3, 1966, a copy of which is attached as Exhibit B.

or four or five days is bound to include at least one daming (sic) letter, you can see that the results could be disastrous.

"I do not mean to panic everybody involved by this letter and my letter of even date. I can ask no more than that each person involved do his part in cutting down the extent of our obvious violations."

After the investigation continued for some period of time, we concluded that it was necessary to determine the extent of the apparent violations of the registration provisions of the Securities Act and the Investment Company Act. Accordingly, the Commission then demanded that IOS produce, pursuant to its 1960 undertaking, its customers' records or its records of all transactions or accounts effected by IOS with or for United States citizens or nationals, whichever IOS preferred. Although that undertaking was still in effect, IOS refused to produce the records relying on Swiss secrecy laws. Also, during the course of the investigation, a subpoena was served on the manager of the IOS branch in Puerto Rico for production of the books and records maintained in that office relating to sales of interests in FOF to United States citizens. In response, in December 1965, IOS brought an action in the United States Federal District Court in Puerto Rico to enjoin the investigation and to quash the subpoena. The Litigation

IOS' lawsuit to enjoin the Commission's investigation was, in effect, a final effort to prevent the Commission from further delving into IOS' activities, such as the reciprocal brokerage and give-up arrangements, IOS' sales of interests in FOF to Americans, the effect of its purchases and sales on the United States markets and the conflicts of interests of its affiliates.

In the litigation, IOS sought a declaratory judgment that it could withdraw its broker-dealer registration and that it had not violated the Securities Exchange Act and the rules thereunder when it failed to comply with the Commission's demand. IOS questioned the Commission's jurisdiction and relied, in part, on alleged interdictions of the Swiss secrecy laws as justifying non-compliance with the Commission's demand. On February 3, 1966, shortly after IOS started the lawsuit, the Commission issued an order for public proceedings pursuant to Sections 15(b) and 15A of the Securities Exchange Act and IOS then sought to enjoin the conduct of the proceedings.

The District Court in Puerto Rico flatly rejected IOS' jurisdictional arguments, quickly dismissed the complaint to quash the subpoena and subsequently granted the Commission's motion for summary judgment. The District Court rejected IOS' argument that the Commission's jurisdiction was limited and also did not accept the argument bottomed on the provisions of the Swiss secrecy laws. The Court accepted the view that Swiss law did not preclude IOS from producing its records for staff review in accordance with the provisions of the Securities Exchange Act. Moreover, the Court held that even if there were such a conflict, IOS, as a registered broker-dealer, was nevertheless under an obligation to comply with the United States law to which it submitted, and, if the public interest requires disclosure of its books and records to the staff, then IOS had to decide whether or not it wished to continue to do business in the United States. If IOS wished to do so through the use of the mails and facilities of interstate commerce, the Court said that it must be willing to comply fully with the United States law. If not, it was up to IOS to determine whether it wants to do business. IOS appealed and also sought a temporary injunction blocking the conduct of the proceeding pending disposition of the appeal. The Court of Appeals for the First Circuit unanimously turned down the request for a temporary injunction," stating that:

"... it is unthinkable that an administrative agency cannot even institute a proceeding until it has had, in effect, the permission of the district court and of the court of appeals whenever the parties to be investigated choose to deny its jurisdiction."

The Commission's Proceeding

The Commission's order for proceedings set forth staff allegations of various securities laws violations. First, there was Section 5 of the Securities Act and Section 7 of the Investment Company Act-the registration provisions-in connection with the offer and sale of the IOS Investment Program for the Accumulation of Interests in FOF. This charge was based upon the allegation that the instrumentalities of interstate and foreign commerce were used in connection

3 See Exhibit B attached.

4 A copy of the District Court's opinion is attached as Exhibit C. A copy of the Court of Appeals order is attached as Exhibit D.