Our specific comments are limited to those provisions in these three titles of the bill which relate to securities transactions:

First, title IV proposes to add a new subsection 31 (a) to the Securities Exchange Act of 1934. U.S. broker-dealers and banks will be prohibited from effecting any transactions in any domestic securities initiated by a foreign financial agency unless the foreign firm discloses the identity of the person for whom it is acting or certifies that it is not acting for a U.S. citizen or resident.

The adoption of this proposal will, in our opinion, inevitably lead to a decline in foreign transactions in U.S. domestic securities and encourage the development of markets abroad in U.S. domestic securities.

Rather than requiring the certification or identification in all transactions, it is our suggestion that consideration be given to a more flexible approach by authorizing the Securities and Exchange Commission to require the certification or identification on a selective basis in specific situations.

Second, new section 31(b) (1) would require that U.S. citizens or residents who place orders to buy or sell domestic securities from or through a foreign financial agency give written authorization to the foreign firm to disclose the U.S. person's identity to the U.S. brokerdealer or others with whom the securities transaction is effected. New section 31(b) (2) would require the U.S. person to file periodic reports of his securities transactions with the Securities and Exchange Commission.

We support fully new section 31 (b) which, in our opinion, should discourage some U.S. persons who are considering transacting business in domestic securities abroad.

Third, title III amends section 7(a) of the Securities Exchange Act of 1934 so that margin or security credit requirements which presently apply only to lenders would be extended to all borrowers-whether a loan is made by a foreign or domestic organization.

We recognize the need to attempt to extend regulation of security credit to loans from foreign financial agencies to U.S. citizens and residents and support applying the regulation of security credit to these borrowers. We do not think, however, that is is necesary to extend these requirements to loans made by U.S. institutions which are presently adequately covered under existing section 7(a). We suggest that the proposed amendment of the section be so revised.

Fourth, under chapter 4, title II, the Secretary of the Treasury is authorized to require U.S. citizens and residents to maintain records and file reports on any transaction or relationship with a foreign financial agency.

The broad statutory authority under this chapter and chapter 3 of title II may be viewed by foreigners as a potential for U.S. Government intrusion into legitimate transactions.

In our opinion, the scope of the administrative authority in chapter 3 should be severely limited and chapter 4 eliminated. Proposed new section 31(b) and the disclosure of any interest in a foreign account in conjunction with a Federal income tax return should be adequate from a disclosure standpoint.

We have, as I stated at the outset, reviewed these proposals from a business standpoint to assess the impact that these requirements might have on legitimate transactions both at home and abroad.

It is in this context that we are particularly concerned about the new section 31(a) which would be added to the Securities Exchange Act

of 1934. Foreign financial agencies would be required to either certify prior to any transaction in domestic securities with a U.S. brokerdealer or bank that they are not acting for a U.S. citizen or resident or identify the person for whom they are acting.

To require this in every transaction carries with it an unfavorablealbeit unintended-implication that the foreign institution is suspected of being a party to a violation of U.S. laws. The certification requirement will, in our opinion, dissuade foreign institutions from dealing in U.S. domestic securities with U.S. firms.

A reduction in foreign transactions in domestic securities by foreign residents will have an adverse impact on the Nation's balance-of-payments position. Similarly, a diminution of trading in U.S. domestic securities by foreign residents through U.S. broker-dealers may lead to a decline of securities markets in the United States vis-a-vis the rest of the world.

Further, we do not think it is necessary, from an enforcement standpoint, to require certification or identification prior to every transaction.

Foreign purchases of U.S. domestic securities have been on the increase. As a result, there has been a favorable impact on the U.S. balance of payments.

In 1969, a net capital inflow of almost $1.5 billion resulted from international securities transactions.

In part, foreign investment in U.S. domestic securities has been stimulated by the enactment of the Foreign Investors Tax Act in 1966. This act originated with the Fowler Task Force, appointed by President John F. Kennedy, and headed by then Under Secretary of the Treasury Henry Fowler, which was assigned the task of “examining ways and means of promoting increased foreign investment in securities of U.S. private companies.

We are concerned that foreign institutions will view the certification or identification requirements with disdain and as a result will seek investments away from U.S. domestic securities through non-U.S. firms.

In recent years, the major stock exchanges in Europe have commenced active trading in securities of U.S. companies. Further, the past several years have seen the development of a Eurobond market in debt securities of U.S. companies. Currently, there is considerable interest in Europe in expanding the local markets in equity securities of U.S. companies. Serious consideration is also being given to the development of a "Euroshare" market in Europe.

The greater depth and liquidity of the markets in securities traded on the New York Stock Exchange will, we are confident, continue to make our exchange the primary market for listed securities. However, restraints on foreign investment in the United States are not a desirable development as foreign investment is becoming an increasingly more important source of volume in our markets. Total direct purchases by foreigners of stocks in U.S. companies amounted to more than $12 billion in 1969.

If, on the other hand, markets of greater depth in shares of U.S. companies are encouraged to develop in Europe, not only will our balance of payments and our securities markets be adversely affected, but the law enforcement reasoning behind the certification and identification requirements will cease to be applicable. Foreigners and U.S.

citizens and residents will be able to buy and sell shares of U.S. companies in these foreign markets without any particular difficulty.

In our opinion, new section 31 (b) will be much more effective from a law enforcement standpoint and will not disrupt legitimate international securities transactions.

The regulatory approach in section 31(b) should provide law_enforcement authorities with the statutory means to combat evasions of U.S. laws in an effective way. This section requires the U.S. citizen or resident to authorize the disclosure of his identity and authorizes the SEC to require periodic reports of all securities transactions abroad. These two requirements, plus the disclosure on a U.S. taxpayer's Federal income tax return, as suggested by the Treasury Department, of the existence of any interest in a foreign bank account or other account in a foreign financial institution, should provide an effective means of stripping away the secrecy currently surrounding these transactions.

If it is deemed necessary, as a further enforcement method, the Securities and Exchange Commission could be authorized to require the certification or identification on a selective basis in specific situations.

This approach would have the advantage of flexibility in that an effort could be made to apply these requirements in a manner acceptable to foreign organizations and consistent with the requirements of local law. Further, if necessary, possible violations of U.S. laws might be pursued by requiring the certification or identification in specific

cases.

It is our understanding that the amendment to section 7(a) of the Securities Exchange Act of 1934 has been prompted by situations where U.S. persons have received loans from foreign institutions to purchase domestic securities. In some cases, these loans could not have been made by U.S. institutions without violating existing margin requirements. To deal with this situation, section 7(a) is being amended to apply the margin regulations to the borrower.

However, the proposed new section 7(a) goes much further, in that it will apply to all borrowers, even those who receive loans from domestic lenders who are presently complying with the margin requirements. To our knowledge, there has been no showing that it is necessary or desirable to further extend margin regulation to borrowers receiving loans from U.S. institutions to purchase securities. Absent such a showing, it seems to us that the existing requirements have proven effective and the margin regulations need not be extended to borrowers receiving loans in the United States.

In summary, we recognize the need for legislative action to reach organized criminal elements and law violators who attempt to escape detection because of the secrecy surrounding foreign bank accounts and transactions arising from these accounts. We have offered these suggestions today in an attempt to improve S. 3678, so that legitimate international transactions in securities are not unduly hampered.

I should also like to submit, Mr. Chairman, a supplement to our testimony concerning certain technical suggestions which might be of interest to your committee.

Senator PROXMIRE. Without objection, your attachment, and also your memorandum supplementing your testimony will be printed in the record at this point.

(The supplemental memorandum and attachment follows:)

MEMORANDUM SUPPLEMENTING TESTIMONY OF ROBERT W. HAACK

Title IV of S. 3678 proposes a new Section 31 to the Securities Exchange Act of 1934. As presently written the new Section may be susceptible to some unintended and unfortunate interpretations. These could all be taken care of by redrafting the Section without affecting its intended objectives.

Subsection (a) would prohibit any broker-dealer or bank from effecting any transaction in a domestic security "if such transaction was initiated by a foreign financial agency" unless at or before the time of the transaction certain information has been furnished by the foreign financial agency. The basic difficulty lies in the quoted phrase. The broker-dealer or bank effecting a particular transaction will ordinarily know only the party on the other side of the transaction with which it deals directly. That party may, in fact, be only an agent for a "foreign financial agency," but the broker-dealer or bank would not know this. If a foreign financial agency had "initiated" the trade, but had used one or more agents in completing it, the broker-dealer or bank would violate Section 31(a) if it did not receive the information required by the Subsection at or before the time of the transaction. This is obviously an inequitable result.

If the language of the Subsection were re-drafted so that it would come into play only when the broker-dealer or bank dealt with a foreign financial agency knowingly, the unintended sweep of the Subsection would be avoided.

Subsection (b) also might be interpreted to have an unintended and unfortunate consequence. As written, it precludes any United States citizen or resident from buying or selling directly or indirectly any domestic security from or through a foreign financial agency unless the United States citizen or resident gives certain written authority to the foreign financial agency and files such reports as the Securities and Exchange Commission may require. The unintended scope of the language used can be illustrated: Suppose a customer living in Kansas orders the purchase of 100 shares of U.S. Steel through his local broker, the trade to be executed on the New York Stock Exchange. The broker who executes the order purchases the stock from another broker who, in fact, but unbeknown to the buying broker, is selling the 100 shares for a foreign financial agency. Under these facts the Kansas resident, because he purchased a domestic security "indirectly" from a foreign financial agency, may be said to have violated Section 31(b), though of course he will have done so unintentionally and quite by chance.

This example points up just one possibility of inadvertent violation of Section 31 (b). The language of the Subsection should be redrafted so that the only the citizen or resident who knowingly deals with the foreign financial agency is subject to the Subsection.

A third difficulty with both Subsections (a) and (b) of proposed Section 31 arises because of the definition of "foreign financial agency" in Section 203 (h) of the Currency and Foreign Transactions Reporting Act included as Title II in S. 3678. That Section 203 (h) defines "foreign financial agency" to mean any financial agency (which term, of course, includes any bank, broker or dealer) "which transacts any business as such at any place not subject to the jurisdiction of the United States". Hence it might be argued that a domestic brokerage house having one or more foreign branch offices is, with respect to all its transactions (even its wholly domestic transactions) within the definition of "foreign financial agency". Any such interpretation would greatly increase the sweep and unintended consequence of Section 31. This result could be avoided by redefining the term "foreign" along the lines of the definition which was contained in H.R. 15073 as it passed the House of Representatives. That definition made it clear that the word "foreign" limited the applicability of the provision in question to those functions performed outside the United States.

In addition, the opening clause of Section 31(a) might be misconstrued. Presumably, that opening clause is intended to refer only to persons engaged in the business of effecting securities transactions for others or engaged in the business of buying and selling securities for his own account. It might, however, be misread, because as presently written it could be construed to apply to any person buying and selling securities for his own account whether or not as a part of a regular business. To overcome this construction the opening clause of the subsection should make clear that as to persons buying and selling securities for their own account, the subsection applies only to such persons who do so as a part of their regular business. Attached is a redraft of Section 31 incorporating all changes suggested to overcome the problems referred to above. The redraft also incorporates the New York Stock Exchange suggestion that Sub

section (a) should apply only to those specific situations where deemed neces-
sary by the Securities and Exchange Commission.

"SEC. 31. (a) Whenever required in any particular case by such rules, regula-
tions or orders as the Commission may adopt as necessary or appropriate in
the public interest, no [No] person engaged in the business of effecting transac-
tions in securities for the accounts of others, or of buying and selling securities
for his own account through a broker or otherwise, shall knowingly make use
of any means or instrumentality of interstate commerce or of the mails, or of
any facility of any national securities exchange, to execute or cause to be
executed, or to effect or cause to be effected, directly or indirectly, any transaction
in any domestic security, [if such transaction was initiated by a] with any
foreign financial agency (as defined in section [203 (h)] of the Currency and
Foreign Transactions Reporting Act), unless at or before the time of the
transaction-

(1) such foreign financial agency has disclosed to such person the
identity of all persons having any beneficial interest in such transaction; or
'(2) such person has accepted in good faith a certification from such
foreign financial agency that no citizen or resident of the United States
has any beneficial interest in the transaction to be effected.

(b) No citizen or resident of the United States shall knowingly, directly or
indirectly, purchase or sell or arrange for the purchase or sale of any domestic
security from or to [or through] a foreign financial agency, unless such citizen
or resident-

'(1) gives a written authorization to such agency to disclose his identity
to any person (A) engaged in the business of effecting transactions in
securities for the account of others or for his own account through any
means, instrumentality, or facility referred to in subsection (a), and (B)
the services of which are utilized in connection with such purchase or
sale; and

'(2) files periodic reports with the Commission disclosing the details of
any such purchase or sale in accordance with such regulations as the
Commission may prescribe.

(c) As used in this section, the term 'domestic security' means a security
the issuer of which is a resident of, or is organized under the laws of, or has
its principal place of business in, a place within or subject to the jurisdiction of
the United States."

1 Excludes transactions between foreigners, but includes transactions between Americans on foreign markets.

2 Excludes transactions between Americans, but includes transactions with other foreigners on American markets.

3 Negative figures indicate an outflow of capital from the United States.

4 Preliminary.

Source: Treasury bulletin.