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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

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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:)


New York, N.Y., June 18, 1970. Hon. WILLIAM PROXMIRE, 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,


§ 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 bebalf 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.



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 demonstrate that it is just as interested as this committee in stopping unethical or illegal activity involving securities transactions which may take place by the utilization of secret bank accounts in foreign countries. In this connection, the association's board of governors recently approved an amendment to its free-riding regulations which will tighten and make more meaningful the restrictions upon the sale of hot stock to persons considered insiders in the securities industry by the utilization of such secret numbered accounts.


While the hot issue market is not currently with us it could return someday and these new regulations will have positive results in curtailing the distribution of hot stock improperly to insider persons. Such practices have long been prohibited by the association's rules but the nature of secret foreign bank accounts enabled circumvention thereof.

S. 3678, as I understand it, will impose certain detailed recordkeeping and reporting requirements upon banks and other financial institutions including broker-dealers and will impose reporting requirements in respect to transactions executed by individuals with foreign financial institutions, and the export and import of monetary instruments which include, in addition to coin and currency, such types of checks, bills, notes, bonds or other obligations or instruments as the Secretary of the Treasury may by regulation specify.

The bill would also amend the margin provisions of the Securities Exchange Act of 1934 to make the margin requirements applicable to the borrower as well as to the lender of funds for the purchase of securities on margin.

In these respects, the bill is substantially similar to the bill which was recently passed by the House of Representatives.

It goes further, however, in two very important respects insofar as the broker-dealer community is concerned. In this connection, I refer to the fact that it prevents U.S. broker-dealers from effecting transactions in U.S. securities on behalf of a foreign bank or broker unless the foreign bank or broker discloses the purpose and for whom it is acting or certifies that it is not acting for a U.S. citizen or resident.

Secondly, the bill would require U.S. citizens who place stock orders through foreign banks or brokers to give the foreign bank or broker permission to disclose the person's identity to the U.S. broker-dealer with whom the transaction is ultimately effected.

As explained by Senator Proxmire in his statement introducing S. 3678, the purposes of these provisions are to remove the veil of secrecy surrounding foreign stock transactions and enable foreign banks or brokers to disclose a U.S. citizen's identity without violating their own country's secrecy laws.

The association is fully aware of the problems with which the bill is attempting to deal and the abuses which it is designed to curb. The objectives of the bill are laudable and desirable and the association's foreign committee (indeed all of the officials of the association) is no less anxious than any other American citizen or taxpayer to deal with these abuses.

We are, therefore, strongly in favor of achieving the purposes and objectives of the bill though we disagree with some, but not all, of the methods spelled out in it to achieve them.

I think it might be appropriate to note at this point Senator, that this statement reflects the thinking of the members of the foreign



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