sufficient to meet the bank's obligations, it can call on the 80 percent of the capital subscriptions of its members, which is subject to call only for that purpose. That 80 percent now aggregates $6,678,800,000 of which $2,540,000,000 is an obligation of the United States Government.

The bank is essentially a cooperative and not a profit-making institution. Nonetheless it is important to the credit standing of the bank that its operations shall not be conducted at a loss. In that respect the record of the bank has been creditable. As of March 31, 1949, in addition to over $6,700,000 held in its special reserve, the bank showed a surplus from operations of over $10,400,000. While the margin of profit will necessarily be narrower as the bank uses more and more borrowed funds in its lending operations, the record is such as to justify the expectation that the bank can continue to build a satisfactory surplus from its operations.

STATUTORY IMPEDIMENTS TO MARKETING OPERATIONS OF THE

INTERNATIONAL BANK

The bill, in a broad sense, is part of a legislative program in this country designed to facilitate the sale by the bank of its securities. When the bank commenced operations in June 1946, its obligations generally were not eligible for investment under State laws in States in which the largest institutional investors-commercial and savings banks, insurance companies, and fiduciaries-were located. Since that time, many States have enacted legislation or have issued administrative rulings authorizing such investment. At the present time the bank's bonds are legal for investment by commercial banks in 44 States and the District of Columbia, for savings banks in 27 States and the District of Columbia, for insurance companies in 35 States, and for trust funds in 31 States and the District of Columbia. Under a ruling of the Comptroller of the Currency national banks can purchase the bank's bonds up to 10 percent of their capital and surplus, and the bonds are eligible as security for United States Government deposits.

Under the National Bank Act, however, national banks are not permitted to deal in the bank's bonds, although they are permitted to deal in United States Government bonds and bonds of States and municipalities and certain other public agencies. The bill would amend section 8 of the National Bank Act (sec. 5136 of the Revised Statutes) so as to permit national banks and State member banks of the Federal Reserve System to deal in bonds issued by the International Bank. That would not only broaden the market for the initial distribution of bonds by the bank but it would also be of benefit to investors in the bank's bonds because it would enable national banks and other member banks of the Federal Reserve System to maintain a market in the bonds, which would be a stabilizing influence on the market for the bonds.

At the present time the market for the bank's bonds is narrow and any substantial offering of or bid for the bonds results in undue fluctuations in prices. If the national banks and other member banks of the Federal Reserve System could take a position in the bank's bonds it would broaden their market and tend to diminish the extent of the fluctuations in their prices.

Moreover, there are two general categories of bonds which are dealt in on the American market. One category includes United States Government, State, and municipal bonds, which are exempt from the Securities Acts, except for the fraud provisions, and which are dealt in primarily by banks and dealers who specialize in those securities. The other category includes bonds of private corporations and foreign issuers, including foreign governments, which are not exempt from the Securities Acts and which are dealt in primarily by dealers who do not specialize in Government bonds. The bank's bonds are more akin to bonds of the first category and at the present time they are dealt in primarily by dealers who specialize in bonds of that category. The committee believes, therefore, that the bank's bonds should be given the same exemptions from the Securities Acts that are given to United States Government, State, and municipal bonds.

The natural market for the bank's bonds is the same as the market for Government and municipal bonds. At the present time the bank is handicapped in distributing its bonds in that market both because the banks cannot deal in the bank's bonds and because dealers in Government and municipal bonds are not accustomed to deal in securities which are subject to the Securities Acts and are, therefore, reluctant to deal in the bank's bonds for their own account.

PROTECTION OF INVESTORS

Careful attention has been given to the question whether the proposed legislation is consistent with the interests of the public and investors. The committee has concluded, as has the National Advisory Council, that these interests are amply protected by reason of the characteristics of the bank itself and its securities and the nature of the safeguards provided in the bill.

As noted earlier, under the articles of agreement of the bank and the Bretton Woods Agreements Act the bank cannot sell securities in the United States without the approval of the National Advisory Council. The United States representative on the board of executive directors of the bank keeps the Council informed of its operations. If at any time the Council considers that the sale of securities by the bank in the United States would be contrary to the public interest, it can refuse to approve the sale.

The Securities and Exchange Commission has an observer on the National Advisory Council who is also a member of the staff of the Council. The Commission is thus kept informed of any applications. by the bank for approval of the sale of its securities in the United States and the Commission can, through its observer, consult with and advise the National Advisory Council on all such applications.

Under the bill the Securities and Exchange Commission could require the bank to fle with the Commission such annual and other reports with regard to securities issued or guaranteed by the bank as the Commission deemed appropriate and necessary in the public interest or the interest of investors. The Commission can thus be fully informed with regard to sales of securities by the bank, and if the commission should have res on to believe that the sale of securities by the bank would be contrary to the public interest or the interests of investors, it could, if it found it necessary to do so after consulting the National Advisory Council, exercise the power given

to it under section 3 of the bill to suspend the exemption of the bank's securities from the Securities Acts. Thus the Securities and Exchange Commission would still have ample power to require a full disclosure of the facts in connection with any sale of the bank's securities in the United States and to prevent any abuse of the exemptions by the bank.

In addition, the Comptroller of the Currency can at any time revoke the authority of the national banks and State member banks of the Federal Reserve System to invest or deal in or underwrite securities issued by the International Bank.

Last but not least, the bank is an international institution having on its Board of Executive Directors representatives of its 43 member governments. It is not an institution organized for private profit and its international character requires that it give the fullest practicable publicity to its operations. This it does through annual and quarterly financial reports and releases to the press. The record of the bank's operations in the past 3 years is adequate assurance that investors in its securities will receive full and accurate information as to its financial condition and its operations. Any other assumption would be unrealistic in the extreme.

POSITION OF INTERESTED GOVERNMENT AGENCIES

The National Advisory Council, the Secretary of the Treasury, and the Board of Governors of the Federal Reserve System, as indicated in their letters set forth in the appendix hereto, have approved the bill.

The Securities and Exchange Commission has stated that it does not oppose the bill, as indicated in its letter set forth in the appendix hereto. In connection with the exemption under the bill for securities issued or guaranteed by the bank from the provisions of section 9 of the Securities Exchange Act of 1934 and the rules thereunder relating to manipulation and stabilization of securities, the Securities and Exchange Commission has stated in such letter that it has been its position that securities which are not subject to such provisions, either because they are not traded on a national securities exchange or because they are classified as "exempted securities" under that act, are nevertheless subject to much the same prohibitions under the general antifraud provisions of section 17 (a) of the Securities Act of 1933 and sections 10 (b) and 15 (c) (1) of the Securities Exchange Act of 1934, with respect to which there are no exemptions.

CONCLUSION

The International Bank, in the 31⁄2 years of its existence, has proved itself to be an effective instrument of international cooperation. What was conceived at Bretton Woods as a somewhat daring venture in international finance has become an effective reality. The bank's future progress, however, depends on its ability to raise adequate funds to finance its lending operations. Enactment of this legislation will substantially assist the International Bank in raising such funds. The committee believes that it is in the best interests of the United States that the bill receive favorable consideration.

EXPLANATION OF THE BILL BY SECTIONS

Section 1: This section permits national banks and State member banks of the Federal Reserve System' to deal in and underwrite obligations issued by the International Bank which are at the time eligible for purchase by a national bank for its own account, subject to the limitation, however, that none of such banks shall hold such obligations as a result of underwriting, dealing, or purchasing for its own account in a total amount exceeding at any one time 10 percent of its unimpaired paid-in capital stock and 10 percent of its unimpaired surplus.

Section 2: This section amends the Bretton Woods Agreements Act by adding a new section, section 15, which provides the following: (a) It provides for classifying as exempted securities within the meaning of section 3 (a) (2) of the Securities Act of 1933 and section 3 (a) (12) of the Securities Exchange Act of 1934 any securities issued by the International Bank (including any guaranty by the Bank, whether or not limited in scope), and any securities guaranteed by the bank as to both principal and interest. Under the Securities Act of 1933 a guaranty is considered to be a security distinct from the underlying obligation and the registration provisions of the act would be applicable to each. The parenthetical language "(including any guaranty by said bank whether or not limited in scope)" is intended to make it clear that the exemption extends to any guaranty of the International Bank, regardless of the scope of such guaranty. However, with respect to any security which may be guaranteed by the International Bank (as distinct from the guaranty itself), the exemption extends only to securities which are fully guaranteed by the International Bank as to both principal and interest.

(b) It requires the International Bank to file with the Securities and Exchange Commission such annual and other reports with regard to such securities as the Commission shall determine to be appropriate in view of the special character of the bank and its operations and necessary in the public interest or for the protection of investors.

(c) It provides that the reports required to be filed with the Congress by the National Advisory Council under the provisions of section 4 (a) (6) of the Bretton Woods Agreements Act shall also cover and include the effectiveness of the provisions of the bill referred to above in facilitating the operations of the bank and the extent to which the operations of the bank may assist in financing European recovery and the reconstruction and development of the economic resources of member countries of the bank and the recommendations of the Council as to any modifications it may deem desirable in the provisions of the bill.

Section 3: This section authorizes the Securities and Exchange Commission, acting in consultation with the National Advisory Council, to suspend the provisions of the bill exempting securities issued or guaranteed by the bank from the Securities Act and the Securities Exchange Act at any time as to any or all securities issued or guaran

This section amends par. seventh of sec. 8 of the National Bank Act, as amended (U. S. C., title 12, sec. 24). Sec. 335 of the same title provides that "State member banks (of the Federal Reserve System) shall be subject to the same limitations and conditions with respect to the purchasing, selling, underwriting, and holding of investment securities and stock as are applicable in the case of national banks under par. 'Seventb' of sec. 24 of this title."

teed by the bank during the period of such suspension. In addition, it requires the Commission to include in its annual reports to Congress such information as it shall deem advisable with regard to the operations and effect of the bill and in connection therewith to include any views submitted for such purpose by any association of dealers registered with the Commission.

The SPEAKER OF THE HOUSE OF REPRESENTATIVES.

APRIL 13, 1949.

SIR: Under the Bretton Woods Agreements Act, as amended, the National Advisory Council is called upon, among other things, to make recommendations to the Congress as to how the International Bank for Reconstruction and Development may be made more effective and on any necessary or desirable changes in the act.

It is the view of the National Advisory Council that certain amendments to the Bretton Woods Agreements Act and the National Bank Act would be a desirable contribution to the effectiveness of the International Bank, particularly with respect to its financing operations.

The lending activities of the International Bank depend to a large extent on its ability to raise funds in the securities markets of the United States. Considering the character of the bank as an international institution, the substantial official participation of the United States in its activities and direction, and the nature of its securities, it would appear desirable that the bank have available to it avenues of distribution for its securities broader than those permitted for offerings of purely private securities. To accomplish this objective, existing Federal statutes need to be amended.

One of the principal problems arises from the fact that although national banks may invest in securities issued by the International Bank, the National Bank Act does not authorize national banks to deal in securities 'ssued by the International Bank, as they presently may do in obligations of the United States and general obligations of any State or any political subdivision thereof. For this reason the market in the bank's obligations is restricted, tending to interfere with the marketing operations required by the bank if it is to engage in lending on a scale appropriate to its functions and responsibilities. Under the circumstances, the Council is of the opinion that the National Bank Act should be amended to permit nation 1 banks to deal in securities issued by the Interrational Bank.

Even with such an amendment to the National Bank Act, however, one further restriction will have to be removed before national banks will deal actively in securities issued by the International Bank. National banks, in marketing Federal, State, and municipal securities, are dealing in exempt securites under the Federal Securities Acts and their whole marketing system is adapted to dealing only in such exempt securities. For that reason, securities of the International Bank should be exempted from these acts if they are to be dealt in by national banks. The Council recommends, therefore, that the Bretton Woods Agreements Act be amended to make securities issued or guaranteed by the bank exempt securities under the Securities Acts and to provide for the regulation of such securities under standards which are appropriate to the marketing operations of the bank.

I am enclosing a draft of a proposed bill embodying amendments to the National Bank Act and the Bretton Woods Agreements Act along the lines indicated above. It is respectfully requested that you lay the proposed bill before the Senate. A similar bill has been transmitted to the Speaker of the House of Representatives.

The Bureau of the Budget has advised me that the draft legislation is in accord with the program of the President.

Very truly yours,

JOHN W. SNYDER,

Chairman, National Advisory Council on International Monetary and Financial Problems.