Mr. CALVIN. In other words, I am saying they could trade with one another if they had the markets there, a marketplace at which to trade, which they presently do not have in depth, so they have to come to the United States for their trading.

Senator PROXMIRE. Purchases and sales are offsets. We are just talking about the net.

Mr. CALVIN. That's right.

Senator PROXMIRE. The net has to come from here.

Can you think of any legitimate reason why a U.S. citizen would not want his identity disclosed if he executed a securities order through a foreign bank account?

Mr. HAACK. I didn't hear the question.

Senator PROXMIRE. Can you think of any legitimate reason why a U.S. citizen would not want his identity disclosed if he executes a securities order through a foreign bank account?

Mr. HAACK. No.

Mr. CALVIN. NO. If you are talking about section-what is it-31(b) of the bill. We don't object to the requirement that the U.S. citizen give authorization that his identity be disclosed. We support that provision.

Mr. HAACK. I suppose there is one thing that would be perfectly legitimate, just as sometimes an individual or a corporation might wish to acquire a position in shares perfectly within all of the legal ramifications, it might do it on a concealed basis in this country and conceivably it might seek for greater concealment abroad. The fact that it is seeking the nondisclosure is not always to be equated with illegitimacy.

Senator PROXMIRE. Isn't it true though that under the rules of the New York Stock Exchange, your stock exchange, that U.S. broker/ dealers have an obligation to know who has a beneficial interest in a given transaction when it comes from a domestic source?

Mr. HAACK. Yes; we have a "know your customer" rule.

Senator PROXMIRE. Why shouldn't that "know your customer" rule apply on foreign transactions in stocks as well?

Mr. CALVIN. The answer is it applies with equal force. However, there is some difficulty in making this requirement apply in all situations and in dealing with foreign institutions. It is adequate as far as the exchange is concerned at the moment that the people handling that account be informed, that the people who are handling those transactions on behalf of the foreign account are authorized to do so. In other words, they don't attempt to delve into who is the beneficiary, ultimate beneficiary-the person having the beneficial interest. Senator PROXMIRE. But when you get an order from a foreign bank, you can't tell whether it is for the bank or for whom.

Mr. CALVIN. The same thing is true at the domestic bank.

Senator BENNETT. Senator, I can buy stock which would be issued in my name which I can then endorse and hand over to somebody else, and I think I have complied with the law. As far as the broker knows, the stock was issued in my name, but he has no way of knowing who actually holds the physical possession of the stock.

Senator PROXMIRE. Law enforcement agencies could also go to you in those circumstances and get the information. They can't go to a Swiss bank. They run into a veil which they cannot pierce.

Senator BENNETT. I would have to think that one over. I am not sure they can force me to disclose. As long as I am willing to take the responsibility of the ownership of the stock, I am not sure they can force me to disclose where it is actually held.

Senator PROXMIRE. Let me indicate what I am trying to get at. If we do not provide this disclosure and we continue to permit the manipulation of our securities markets through foreign banks accounts, don't we run the risk of weakening foreign confidence in our markets, thus adversely affecting our balance of payments?

Mr. CALVIN. This is one of the reasons why we support section 31 (b). I think this would solve the problem which you are raising-which is certainly based on a valid concern-and one of considerable concern to the New York Stock Exchange; that is, by requiring U.S. residents to identify or authorize themselves to be identified in their transactions abroad. Under this section, the SEC would also have the authority to require that these U.S. persons file periodic reports concerning all their transactions abroad.

This is a provision which we support.

Now, if you couple this with our other suggestion that the SEC be given the authority to require the certification or identification, on a selective basis, we think that the disclosure requirements are rather complete and the type of information you need from an enforcement standpoint should be made available, relying of course, on the SEC to exercise its judgment in a manner that is fair, which we expect they

would do.

Senator PROXMIRE. I think that is a good suggestion, very helpful. Our purpose was that (a) gives us the authority to check up on (b). Suppose there is a certain percentage of illegitimate transactions which are curbed by the disclosure provisions of title IV and that the money goes elsewhere instead of returning to the United States. Are you saying that this is bad-that we should have no reduction in securities transactions or our balance of payments even if the present. level can only be sustained by accepting illegal money? Doesn't this put us in the category of an "international fence"?

Mr. HAACK. If I had to make the hard choice, I would sit on the side of integrity.

Senator PROXMIRE. Spoken as a true Harvard Business School man and as a true Milwaukeean.

Senator BENNETT. The implication is he hopes he doesn't have to make the choice.

Senator PROXMIRE. The SEC and other enforcement officials have testified that the margin requirements can be better enforced if they apply both to the borrower as well as the lender regardless of whether the borrower borrows here or abroad. After all, the lender depends upon the certifications made by the borrower as the purpose for the loan. Hence, if the borrower deceives the lender in order to circumvent the margin requirements, why shouldn't the borrower be prosecuted? Mr. HAACK. This is a very interesting provision in the bill, and we think it is ingenious, but we think it might go too far.

Mr. CALVIN. Yes, in other words, we agree and support this proposal as it relates to U.S. persons who are receiving a loan from abroad, because I think as the testimony in the House hearings and here have indicated, there is no way to cover those transactions today. So, this is

a good and ingenious provision as it relates to U.S. persons getting loans abroad.

But this provision dosen't stop there, as you know. It applies to all borrowers. It doesn't draw the line as to whether the loan is to a person residing in Milwaukee getting a loan from a Milwaukee bank. That Milwaukee borrower will now also be subjected to margin requirements. We just ask the simple question, "Why?" Have there been abuses in this area? Does every borrower in the United States need to be regulated when getting a loan from a U.S. lender?

And we just don't think the present requirements have proved to be that ineffective as they relate to domestic transactions. As they relate to foreign transactions, this provision should be enacted into the law, but on domestic transactions we don't think it is really needed. I think under the present section 7(a) and the cases arising under it, if you do have a situation involving fraud, there are some aspects of 7(a) where borrowers might be covered. Precisely what they are at the moment, I don't know. But as I remember, you can extend 7(a) to borrowers if there is a fraudulent type of transaction. I think I am correct in that.

Senator PROXMIRE. Don't you feel that under present circumstances that a person or persons can violate our margin requirements in effect. by simply borrowing abroad and borrowing on a margin that might be 10, 15, or 20 percent?

Mr. HAACK. Unquestionably.

Senator PROXMIRE. Which would be destabilizing, perhaps, if done in sufficient volume?

Senator BENNETT. It seems to me that when you are dealing with a loan made in the United States and the lender has the responsibility, you have a legal opportunity to get at the loan. You can get at one side of the loan. When you are dealing abroad, you can't get at the lender.

Mr. HAACK. Precisely.

Senator BENNETT. If you require that on the borrower here, you can get at the loan. So, I think in both cases you have an opportunity to get at the legality of the loan, and here you don't need two chances you already have one.

Mr. HAACK. Precisely.

Mr. CALVIN. That is our position much better stated than we have stated it, sir.

Senator PROXMIRE. My last question is, chapter 4 of title II authorizes the Secretary to issue regulations requiring the submission of reports or the keeping of records on transactions with foreign financial institutions. He has broad and liberal exemptive authority to exempt. small or routine type transactions.

Yesterday, Robert Morgenthau, who was our first witness, said this chapter would be crucial to prosecutors obtaining evidence of the misuse of secret foreign bank accounts, and yet you recommend that it. be eliminated. If you are concerned by the broad scope, why not limit that scope instead of dropping the provision altogether?

Mr. CALVIN. That is a valid point, and we did struggle with trying to limit the scope of this section. The problem there is that when you do that, when you try and limit the scope of the Secretary's rulemaking authority under this section, it becomes apparent-at least it did to

us-that the type of information that you need from the enforcement standpoint will be produced by this new requirement in section 31 (b) that we have been talking about and by the disclosure on a Federal income tax return of the existence of any interest in a foreign bank account.

In other words, those two requirements, the reporting on your tax return requirement the Treasury has talked about, and this new requirement that is in the bill here

Senator PROXMIRE. 31(b) only applies to securities, doesn't it? It doesn't apply to gold or commodities, does it? I wish you would struggle some more on this and give us some language when you correct your remarks. Will you do that?

Mr. CALVIN, Yes; we will.

(The information referred to follows:)

Hon. WILLIAM PROXMIRE,

NEW YORK STOCK EXCHANGE,

New York, N.Y., June 18, 1970.

Chairman, Subcommittee on Financial Institutions,
Committee on Banking and Currency,

Washington, D.C.

DEAR SENATOR PROXMIRE: As requested in connection with our testimony on S. 3678 last week, we have attempted to rewrite Section 241 of Chapter 4 of Title II to limit the Secretary of the Treasury's rule-making authority.

The objections which other witnesses expressed with respect to the Section, I think, are valid and, of course, our testimony reflected the same view in that we suggested that the entire Chapter be deleted, although Secretary Rossides indicated that he would reconsider the matter and possibly come back with a different proposal, if one could be developed.

The best we have been able to do in responding to your request is to rewrite the Section so as to limit its application by taking into account our own reservations and those expressed by other witnesses. Our rewrite is enclosed.

Basically, it diffiers from the Section as it appears in the S. 3678 by making the matter discretionary with the Secretary rather than mandatory, by expressing legislatively the desire to avoid impeding or controlling the export or import of currency, etc., and by providing that the reports would be limited to such information as to which the reporting party had knowledge. The rewrite omits the language in the Bill which requires the report whenever a U.S. person "maintains any relationship, directly or indirectly," with a foreign institution. That language is very broad and would seem to be unnecessary, because the balance of the language would apply whenever a transaction actually took place. Finally, the Section would be amended so as to apply only to transactions involving $5,000 or more.

In other words, the rewrite narrows the scope of the Section considerably, but perhaps even as rewritten the Section would provide an effective tool which might assist in uncovering tax evasion or other fraudulent activity. (Section 242 would not be changed.)

In any event, I hope that the enclosed rewrite will be helpful to the Subcommittee.

Very truly yours,

DONALD L. CALVIN.

§ 241. Records and reports required

The Secretary of the Treasury, having due regard for the need to avoid impeding or controlling the export or import of currency or other monetary instruments and having due regard also for the need to avoid burdening unreasonably persons who legitimately engage in transactions with foreign financial agencies, may by regulation require any resident or citizen of the United States, or person in the United States and doing business therein, who engages, on behalf of himself or another, in any transaction involving not les sthan $5,000 with a foreign financial agency to maintain records or to file reports, or both, setting forth such of the following information as is known to such person, in such form and in such detail, as the Secretary may require :

(1) The names and addresses of the parties to the transaction.

(2) The legal capacities in which the parties to the transaction are acting, and the names of the real parties in interest if one or more of the parties are not acting solely as principals.

(3) A description of the transaction including the amounts of money, credit, or other property involved.

Senator BENNETT. In the testimony of Mr. Morgenthau yesterday, it was implied that certain American banks or some American had established branches in these haven areas for the purpose of being able to supply the kind of service that is attached to a secret account, and by implication for the purpose of making it possible for them to become participants in illegal transactions.

Do you have any knowledge that that has and is going on on the part of American banks?

Mr. HAACK. I may have some suspicions, but they are completely undocumented or unproven.

Senator BENNETT. Can you provide the committee privately with any information which would help us resolve that problem? Mr. HAACK. Sure.

Senator BENNETT. I don't think it should be brought out in the public session, but it would be helpful if you could write us a memo. Senator PROXMIRE. Yes, I wish you would.

Mr. HAACK. Yes.

Senator PROXMIRE. It will go to the confidential file of the committee. Thank you very, very much for a fine job.

Our next witness is Mr. Frank J. Wilson, National Association of Securities Dealers.

STATEMENT OF FRANK J. WILSON, VICE PRESIDENT AND ASSOCIATE COUNSEL OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., ON BEHALF OF HENRI L. FROY, CHAIRMAN, FOREIGN COMMITTEE

Mr. WILSON. I am appearing here today to read Mr. Froy's statement. Mr. Froy had intended to be here, however, he is in Europe and he is ill.

Senator BENNETT. And you are Mr. Wilson?

Mr. WILSON. I am Mr. Wilson and I am vice president and associate general counsel of the NASD.

I would like to point out at this point that this is Mr. Froy's statement. I do not pretend to be expert in things foreign. However, hopefully, I will be able to answer any questions you have. Should I not be able to, we will supply complete answers for the record.

Senator PROXMIRE. That will be very satisfactory. If you want to abbreviate any part of this statement, it will be printed in full in the record. (The complete statement appears on p. 306.)

Mr. WILSON. With that in mind, then, Mr. Chairman, I think it might be well if we skipped over a page or two to the top of page 3. The preceding two pages outline briefly the background of the association and the cooperation which it has previously had with the Treasury Department in connection with other acts, more particularly the Interest Equalization Tax Act.

The above background of the association and its activities is given for the purpose of emphasizing its regulatory character and to

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