Senator PROXMIRE. I would like to congratulate you, Mr. Haack, on the constructive nature of your testimony and especially on the general thrust which is one I think we can all support, that is, we should do all we can to encourage the investment by foreigners in this country and to take advantage of this great strength we have in our remarkable securities market.

It is one of our prides. It is very helpful.

You indicate that the certification or identification requirements of title IV should be used on a selective basis in specific situations. Could you indicate the situations in which you feel this authority would be appropriate?

Mr. CALVIN. Yes, if I may, Mr. Chairman. Maybe I could shed some light on that.

This could be done in a number of ways. I think that at a later point in Mr. Haack's statement he referred to the flexibility which could be developed if the SEC were given rulemaking authority, because what could be done is that the Commission or appropriate authorities in the Government could make arrangements and have discussions with foreign organizations and maybe develop requirements along the lines of those in the bill which would be acceptable to these people and which they would not consider to be burdensome.

If the SEC had such rulemaking authority, that is one thing which could be done.

Another possibility would be

Senator PROXMIRE. What kind of guidance would you give the SEC? What would they cover or what would they exempt?

Mr. CALVIN. In the supplemental statement we have a draft of suggested language of section 31, and what we have done, basically, is to take the present language in the bill, if you take a look at that, rather than require in every case we say "whenever required in any particular case by such rules or regulations or orders that the Commission may adopt as necessary and appropriate in the public interest.”

Senator PROXMIRE. What criteria?

Mr. CALVIN. In terms as to when it should be required? I would say it would be twofold in my opinion. First of all, I think in some cases some foreign organizations would be willing to supply some type of a document, maybe in the form of a certificate, saying that all transactions they transmit to U.S. broker-dealers will be for the account of nonresidents of the United States, this type of thing. In other

areas

Senator PROXMIRE. Would this give the foreigner a veto power? Mr. CALVIN. No; it would not give them to veto power. That is the second point I am coming to.

In other cases, say, for example, one of the earlier witnesses referred to a well known case where there were three Liechtenstein trusts and the Government was frustrated in its effort to get information arising from transactions with these trusts. What could be done is that the Commission could require that in all transactions that a U.S. brokerdealer had with, say, any trust in Liechtenstein, or at least any specific trust, that the certification or identification requirement must be complied with.

If local law in that country, say Liechtenstein, did not permit the certification to be given, this might be an effective means of stopping transactions from arising.

If local law did permit it, then certification could be used as the enforcement device, which seems to be the intent of the bill. In other words, the thrust of this, Mr. Chairman, is to give some flexibility but not to eliminate the requirement totally as some have suggested.

We see some value in having this authority in the statute, but we see a lot of problems if it is required in every case.

Senator PROXMIRE. That is very helpful. In fact, that is more constructive I think than the suggestion we got from the Treasury Department.

Mr. CALVIN. I think they suggested it be eliminated, but I think they also indicated they may have some existing rulemaking authority that could be made to work in this area.

Senator PROXMIRE. In your statement you indicate that a net capital inflow of almost $1.5 billion resulted from international securities transactions. During that same year, the unexplained capital outflowcommonly called "errors and omissions" was $3 billion or twice as great. Isn't it conceivable that some of the $1.5 billion inflow was really American money coming back from secret foreign bank accounts?

Mr. HAACK. I would say there is a possibility.

Senator PROXMIRE. We weren't able to get much of a statement from the Treasury Department as to what this might be. They said they just couldn't tell. Of course, it is hard to tell. Without legislation of this kind, it is very, very hard to estimate.

They are going to try to reconsider it. I think conceivably it could be as much as $1 billion or $1.5 billion. A restriction in capital inflows on securities transactions would not necessarily impair our balance of payments if it were offset by a corresponding restriction in the outflow counted under "errors and omissions," isn't that true?

Mr. HAACK. I would say so, yes.

Senator PROXMIRE. Why would a foreign purchaser of U.S. stock object to having his identity made known to the U.S. broker-dealer who executes the order? After all, his identity isn't made public; it can only become available to law enforcement agencies through appropriate legal process.

Mr. CALVIN. May I ask, would you state that again? Are you saying would the foreign person object to his identity being made know?" Senator PROXMIRE. To the U.S. broker-dealer who executes the order. It is not made public.

Mr. CALVIN. You are talking about the foreigner?

Senator PROXMIRE. That is right, the foreign purchasers of U.S. stock.

Mr. CALVIN. I think he would probably object from the standpoint. of why he should be required to make this disclosure. In other words, as noted in the earlier part of Mr. Haack's statement, I think some people would say that by requiring this identification in every case it carries with it an implication that the foreign institution is suspected of some wrongdoing.

In addition, as I understand section 31, the foreigner would not be required to identify himself but rather the foreign broker-dealer or the foreign financial agency would be required to certify that they are not acting for a U.S. person.

In other words, I don't think they have to give up the name of the foreigner. Do they? The identification only applies when they are acting for U.S. residents.

Senator PROXMIRE. Why would any foreigner if they do not have to be identified—why would any foreigner object?

Mr. CALVIN. I think that goes back to my earlier statement: Why should he be required to give this certification? It carries with it an implication that he is not a desirable purchaser, and why is it really needed from an enforcement standpoint? Some of the witnesses, not us, but some of the other witnesses have just said flatly that this requirement will bring a halt to all foreign transactions in U.S. securities.

We don't believe that.

Senator PROXMIRE. I think your position makes more sense. It might be annoying to some people. Conceivably in some cases they would say they would not buy here. But in many, many cases I presume they would. Their annoyance would be something that would be overcome by better yield or more liquid opportunities and so forth.

Mr. HAACK. Mr. Chairman, I think there is one other factor. Anyone who has done business abroad, either with individuals or with institutions, appreciates that there is a significant difference in temperament as far as Europeans versus Americans are concerned insofar as their desire to protect their privacy or their wish for secrecy and so forth. I think the European temperament is significantly different in this regard from that which it is in this country.

Mr. CALVIN. Mr. Chairman, if I might volunteer at this point, there is one thing that isn't in Mr. Haack's statement that we firmly believe. That is, that at the moment there is considerable interest in Europe in developing markets in U.S. securities. As you probably know, on the Paris Bourse they now have a separate trading section in the afternoon where they trade only in American securities. You can go over to anyone of the major exchanges in Europe and they are now actively interested in trading in U.S. domestic securities. There is considerable incentive for them to do so. At the moment of course the markets are in the United States and in large measure will continue to be so. A requirement like this across the board coupled with, as Mr. Haack has said, this European temperament or disposition against Government intrusion into their financial affairs might serve as an incentive to accelerate this development in establishing markets in Europe in U.S. securities. This is just not a favorable development-even from their standpoint.

The fragmentation of the markets overall is not good and it is certainly not good in terms of our financial markets and our balance of payments in the United States. So if there is no strong enforcement reason why this type of requirement should be imposed, I think you are well advised from a business standpoint not to impose it.

Senator BENNETT. If these European markets in American securities continue to grow and develop, will they not offer a haven for the illegal money that we are trying to get at here, in which case we may actually be fraughting the very purpose that we are attempting to cure. Mr. HAACK. Very true. As a matter of fact there was an article in Barron's magazine I believe within the past 2 weeks relating to the increased activity of Europeans in domestic securities and great thrust was given to what they call an "Euroshare" market.

The "Euroshare" would be an equivalent of a bearer certificate which is not registered, which is freely transferrable and so forth, and it poses a significant threat and could be a haven.

Senator PROXMIRE. It is hard for me to see why the growth of a Euroshare market would adversely affect our balance of payments. The Euroshare market would still have to purchase any of its shares from this country.

Mr. HAACK. No, it could be floated over there, initially distributed. Senator PROXMIRE. If there are investments, say, in General Motors, for example, or in A.T. & T., wouldn't the proceeds come back to this country to our corporation, and wouldn't that be a wash then?

Mr. CALVIN. If I may try to answer that, in some cases, yes, but you could have it financed entirely in Europe maybe through an European subsidiary, a new issue, and the entire activity in that offering would be in Europe; in other words, the initial offering, the funds from the proceeds of the offering, would stay there and the trading in the securities would stay there.

Senator PROXMIRE. Who would make the offering? It wouldn't be made by the company?

Mr. CALVIN. It could be made by a subsidiary of the U.S. company. Senator PROXMIRE. So if they had holdings abroad, for example, if there were a Ford plant somewhere or a General Motors plant abroad, those funds would be expended abroad and raised abroad, and so forth? Mr. CALVIN. That's right.

Senator PROXMIRE. It would be related to our investment abroad as well as the securities market?

Mr. CALVIN. That's right. The other aspect of it, though, Sen

ator

Senator PROXMIRE. Let me interrupt to say that the decision, however, the vital decision, is whether the company would make a decision to invest in this country or abroad. If it decides to invest abroad even if the money were raised here, that money would be sent abroad to put to work.

Mr. CALVIN. They might be more prompted to make the decision to invest abroad if they knew they could raise the capital to establish that plant, or whatever it is, abroad also.

The other aspect of it is a more realistic one in present terms, and that is, as you know-we have a table attached to our statement which includes the Treasury figures on foreign stock purchases in the United States. Now, what will happen, as I mentioned, as trading in U.S. securities takes place there, the foreigner need not come to the United States to buy the 100 shares of XYZ Company that he presently has to buy here because that is where the market is.

So what may happen, will be that you do not eliminate his ability to invest in U.S. securities but do eliminate the necessity for coming to the United States to invest in U.S. securities, so the trading in U.S. securities abroad would be between foreigners.

Senator PROXMIRE. How would that affect the balance of payments? Mr. CALVIN. The present figures on foreign purchases of U.S. securities would be reduced.

Senator PROXMIRE. They would have to get the shares from somewhere, someone in this country?

Mr. CALVIN. No, what I am saying is as the markets develop there, they will have a greater flow

Senator PROXMIRE. But if there is a net increase, they have to get the shares from here, the money would have to flow here.

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.