earlier than the publication of the regulation in the Federal Register and not later than the first day of the thirteenth calendar month which begins after the date of enactment.

(c) The Board of Governors of the Federal Reserve System may by regulation provide that the amendment made by title III shall be effective on any date not earlier than the publication of the regulation in the Federal Register and not later than the first day of the thirteenth calendar month which begins after the date of enactment.

(d) The Securities and Exchange Commission may by regulation provide that the amendment made by title IV shall be effective on any date not earlier than the publication of the regulation in the Federal Register and not later than the first day of the thirteenth calendar month which begins after the date of enactment.

Senator PROXMIRE. Mr. Desch, I have a number of questions, but I will only ask four of them and the rest I would appreciate if you could answer for the record when you correct your remarks. You can do that in writing. (Questions and answers appear on p. 223.) Most of your objection to S. 3678 revolves around what could happen if the Secretary wrote unreasonable or unduly onerous regulations. Couldn't the same objection be raised against practically any legislation on which the Congress relies on the judgment of the administrative agency to carry out the policy of Congress?

Mr. DESCH. Perhaps so, but there are certain standards that we feel should be established. There are some known former Secretaries of the Treasury and others that have not been particularly happy with commercial institutions or financial institutions. We shudder to think of the broad gaged impact this legislation could have if such a person were Secretary of the Treasury.

Senator PROXMIRE. Last week several prominent members of your organization testified on the one bank holding company bill. They all seemed to agree that Congress should delegate broad authority to the administering agencies to define the activities in which bank holding companies could engage.

There was also agreement that the agencies should not be encumbered with specific restrictions or prohibitions.

Why are you willing to trust the banking agencies in this area and not willing to trust the Secretary of the Treasury in the recordkeeping area?

Mr. DESOH. We don't say that we don't trust the Secretary of the Treasury. We just say we don't think Pandora's box should be permitted to become a piece of legislation.

Senator PROXMIRE. Isn't this an inconsistency in this position? You would give the same discretion that you advocate for one bank holding company legislation to the Federal Reserve Board and the other regulatory agencies; yet you would not give that same kind of discretion in this case to the Secretary of the Treasury.

Mr. DESCH. I don't believe there is an inconsistency. I think what we are trying to say about the foreign bank secrecy bill is that certain reasonable standards should be established. We think the one bank holding company legislation, with which I am not quite as familiar, should also establish certain standards without necessarily writing a laundry list. This is the objective in our commentaries.

Senator PROXMIRE. That is what we hope to do, we want to avoid the laundry list. Most of the people in your industry have very strongly and strenuously objected to the laundry list that the House put in their bill. We are interested in this committee in the views of your industry in that respect.

But I wonder if you are inconsistent here.

Mr. HABERKERN. Senator, I would like to say, for example section 206 of the bill is quite unlike ordinary legislation in that it seems to invite discrimination. It says "any such exemption may be conditional or unconditional by regulation, order or licensing, or any combination thereof, may relate to any particular transactions, to the type or amount of the transaction, to the"

Senator PROXMIRE. Where is this, again, sir?

Mr. HABERKERN. On page 12,, in the middle of the page, section 206. So, I would point out to you, sir, that there is quite a difference between the one bank holding company legislation that has been dis

cussed and legislation proposed here which does invite extraordinary classifications and subclassifications.

Senator PROXMIRE. You are still talking about the purposes of the act, you just can't exempt them arbitrarily. I see your argument.

You say one of the problems of the bill is its unmistakable potential for invasion of privacy. Nowhere in the bill does it authorize Government agents to browse at will among the records required to be kept by banks.

As a matter of fact, the House report clearly indicates that Government access to bank reports would only be pursuant to legal process. Doesn't this legislative history substantially mitigate your fear in this respect?

Mr. DESCH. Title I does exactly what you have stated. Title II requires the filing of reports, and I fail to see the difference between an agent coming into the back office of a bank or a financial institution and spinning that microfilm wheel at will to see if there is anything further that he can investigate or if those same microfilm reports are sent down to the Treasury Department here where the same agent can do exactly the same kind of thing.

I think that is the definition of browsing we are trying to deal with. Senator PROXMIRE. As I understand, title II is much more limited. It only covers foreign transactions.

Mr. DESCH. It does include the term "monetary instruments."

Senator PROXMIRE. Where title I covers all?

Mr. DESCH. Monetary instruments could be the $2.50 check that my wife writes to the A. & P., and that is the kind of supervisory authority that we would like to get out of this bill.

Senator BENNETT. What does she get for $2.50?

Mr. DESCH. Very little, sir.

Senator PROXMIRE. What would be the additional cost if all banks were to microfilm checks?

Mr. DESCH. I don't think that the cost is horrendous if we confine it to the term "microfilm."

Senator PROXMIRE. You wouldn't object if we used the term "microfilm"; you object to photocopying?

Mr. DESCH. Which by definition implies hard copy.

Senator PROXMIRE. Senator Bennett.

Senator BENNETT. I have three or four questions, and I am going to submit them for your answer, but I have one because Senator Proxmire has opened it up.

You have discussed privacy and compare it to S. 823. I am inclined to agree with your point, but in the proposed changes of language in your bill, I don't find any specific recommendation which will handle this question of privacy. Maybe it is too much to ask, but that will be one of the questions that I will submit for your more careful consideration.

Mr. DESCH. Thank you very much.

(The questions referred to by Senator Bennett, together with Senator Proxmire's questions mentioned earlier on p. 222, follow :)

REPLIES TO QUESTIONS BY SENATOR PROX MIRE OF CARL W. DESCH Question 1. On page 3 [Desch statement] in talking about reports on currency exports, you say that "the effect of Section 232 would be to require the filing of these reports in advance." How do you come to this conclusion? Sec. 231(b) on page 18, line 5, clearly states that the reports shall be filed "at such

times

as the Secretary may require.” Aren't you once again prejudging what the Secretary might do?

Answer 1. Sec. 232(a) provides for the forfeiture of monetary instruments which are in the "process" of transportation where the required report was not filed or contains material omissions or misstatements. If there is to be forfeiture, it would seemingly have to take place as the monetary instruments leave this country. Instruments could not be forfeited, for example, once a courier reaches Zurich.

Question 2. In your redrafted bill, you would apply the check photo-copying requirement only to checks received from abroad. Yesterday, Asst. Attorney General Wilson and U.S. Attorney Seymour testified that copies of checks were often vital in purely domestic crimes where foreign bank accounts were not involved. Why would you arbitrarily deny this information to law enforcement agents?

Answer 2. The banks now maintain an ever increasing number of records of domestic transactions which are available to law enforcement agencies, subject to appropriate process. We have not heard any testimony which indicates that a prosecution failed because of lack of domestic records, nor have any of the witnesses indicated how such records would have helped in the detection of the crimes described at the hearings. Moreover, no attention at all has been given in the bill to retrieval techniques without which the mass of microfilm would be useless.

Question 3. If this Committee does not agree with exempting domestic checks from the photocopy requirement, what would be your thoughts about the $500 exemption in the House bill?

Answer 3. The exemption really means very little to the member banks of this Association, but we understand it is meaningful to smaller banks and therefore we would have no objection if it were retained.

Question 4. Wouldn't the need to segregate checks under $500 be more costly than simply microfilming all checks?

Answer 4. There would probably be no cost savings if we did not have to microfilm checks under $500.

Question 5. Yesterday, Mr. Seymour indicated it was his impression that most banks microfilm checks already and that only some of the larger banks have discontinued the practice. Is that your impression also, and if so, why have the larger banks stopped microfilming?

Answer 5. Our member banks have not "stopped microfilming." As we indicated to the House Banking and Currency Committee, we microfilm checks when they leave New York City. If they are exchanged among banks locally, where there can be no plane or train accidents, we do not microfilm simply because of the tremendous volume. There are more records today and there are more microfilm rolls of tape in various recordkeeping areas than ever before.

Question 6. How many members of the clearing house still microfilm checks? Answer 6. All 10 members microfilm transit items, both front and back, and always have. Some Clearing House banks do not microfilm checks cleared locally. Question 7. On page 11, [Desch statement] you say the language of Title III could permit the Federal Reserve Board "to regulate borrowings by foreign citizens from foreign banks" I find this a highly fanciful interpretation of the language. How did you come to this conclusion?

Answer 7. I do not believe that our interpretation of Title III is at all fanciful. The reason I said that Title III could permi the Federal Reserve Board to regulate borrowings by foreign citizens from foreign banks is that the language on page 22 beginning at line 4 and running into line 12 contains no geographic restrictions. Because the purpose of Title III is to regulate borrowings from foreign banks by United States citizens, the lack of any restriction of the impact of this lanuage solely to U.S. citizens and residents would make it subject to the interpretation that it could also apply to non-resident aliens.

Question 8. You go on to say that you are recommending language to overcome this alleged difficulty which I frankly doubt exists. However, your actual language goes far beyond this stated intent. Your recommended revision would exempt U.S. borrowers from violating the margin regulations if they borrow from

a domestic creditor, presumably because domestic creditors are already bound by the margin regulations. However, yesterday, the SEC said it would be easier to enforce the margin regulations if they applied to both the borrower and the lender. For example, borrowers may deceive the lender by falsely certifying the purpose of the loan. Why would you limit the ability of the SEC to move against the borrower as well as the lender?

Answer 8. We did not include in our recommendations for changes to Title III language which would subject domestic borrowers from domestic banks to penalties for violation of the legislation requirements because we believed that it was an issue separate from the announced purposes of S. 3678. If the regulatory agencies believe it is desirable to tighten up the laws which they administer, they are quite capable of coming forth with proposed legislation. Thus far, they have not done so on this point.

As you know, under present law borrowers are not subject to penalties for violation of Regulation U. It would be to the interest of banks to subject borrowers to such penalties. Banks now run a risk that a customer may make a false certification and later attempt to repudiate the transaction on the ground that Regulation U was violated. If the statute were to be amended as suggested by your question, banks would be protected from such entrapment.

Question 9. On page 11 [Desch statement] you say that Title IV "will in all probability significantly reduce the volume of U.S. securities held by foreigners." How do you arrive at such a conclusion? If the securities are really owned by a foreigner, why would he object to Title IV? His identity would not have to be disclosed. The bank which placed the order would merely certify that the transaction was not on behalf of a U.S. resident.

Answer 9. It would be virtually impossible in most cases for a foreign financial agency to provide the certification required by Sec. 31(a) because there are many situations where beneficial interest in securities transactions would not be known. If in doubt, responsible foreign financial agencies may refrain from engaging in the transactions. Moreover, the redtape involved in filling out the necessary forms, and the delay in getting the certification to the United States, would probably reduce the volume of U.S. securities held by foreigners. It should, also, be noted that, as drafted, the bill may be deemed to require a certification for each transaction. If so, in view of the volume of trades ordered from abroad and the frequent use of cables, it can be seen that the paper requirements and delay awaiting receipt of certifications would inhibit foreign investment in U.S. securities. Moreover, as "foreign financial agency" is defined, it would include any broker who does business abroad. This could be construed to apply to a New York broker with branch offices abroad and, thus, to apply to transactions between a resident of New York and the New York office of such broker.

Question 10. There is some $40 billion in U.S. securities owned by foreigners. How much of this stock is really owned by U.S. citizens through a secret foreign bank account?

Answer 10. I do not know how much of the $40 billion in U.S. securities owned abroad is really owned by U.S. citizens. However, I would doubt that it is a very significant part of the total.

Question 11. It may well be that full disclosure might induce U.S. citizens to sell their stock owned through secret foreign bank accounts. In this sense, “foreign" ownership might be substantially reduced as you suggest. But is this really so bad? Disclosure will force these funds into the open where they can be subjected to taxation.

Answer 11. We would not be concerned if the only result of Title IV was to force U.S. citizens to sell their stock owned through foreign bank accounts. However, as indicated in my testimony, we believe the effect will be to discourage investment by foreigners in U.S. securities, the importance of which should not be underestimated. Even in the case of U.S. citizens, it seems likely to us that those who now conceal ownership of U.S. securities will merely find some more sophisticated way to conceal such ownership thus frustrating the basic intent of Title IV. Title IV just treats the symptom rather than the disease.