committee, both collectively and individually, all of whom are expert in the foreign markets and who do a business, a day-to-day business abroad.

Being directly involved by daily contact with foreign financial centers and foreign financial institutions, however, and, as such, a part of the intricate international financial mechanism and structure, the foreign committee believes it would be derelict in its duty if it failed to call to your attention the great dangers which it believes to be inherent in some of the proposals contained in S. 3678, especially those restricting a broker-dealer's right to do business with a foreign institution unless certain representations are made. Those provisions, in our opinion, have the potential to do irreparable damage to the mechanism through which international movements of capital are effected by the purchase and sale of American and foreign securities and the shifting of funds from place to place in response to changing conditions and the changing level of interest rates.

Gentlemen, we have a most serviceable international financial mechanism. It is constantly being improved and refined as witnessed by this year's adoption of regulations permitting the use of special drawing rights.

The international financial mechanism is a delicate and sensitive thing but it has permitted the shifting of large amounts of money, billions of dollars, from one center to another.

It has permitted the purchase and sale of all kinds of American and foreign securities here and abroad and it has allowed American companies to borrow large amounts of money in foreign financial centers to the relief of our balance of payments.

Also, the rest of the world purchased several billion dollars of American securities in 1968 and 1969 helping to overcome a sizable deterioration in our trade balance. All in all, these results have stimulated international trade and investment.

All of this was possible only because the rest of the world felt confident that there would never be any interference with the free transfer, movement or shipment of money and/or securities. Therein, in our opinion, lies the strength of the dollar despite our continuing balance-of-payments deficit.

The enactment of the referred to sections of this bill runs the risk of severely damaging this basic confidence in the dollar. In fact, this very proposal has already aroused misgivings abroad, contributing and adding to the already existing nervousness in regard to the future of our securities markets.

We are fully aware of the bill's intent in requiring statements from foreign institutions before a domestic broker-dealer can do business with them, but we believe these provisions will serve to undermine the confidence of foreign investors as to the liquidity of their investments in this country.

Foreign investors who have lived for years with foreign exchange regulations in countries run by dictators or with very weak currency would feel that there is no more protection for them and their funds in the United States than in their own countries. They would interpret such a measure as the first step in the direction of interference with the free flow of foreign currencies.

The existence of the abuses which the bill is designed to prevent was uncovered, at least in part, by the dramatic investigation of former

U.S. Attorney for the Southern District of New York, Mr. Robert Morgenthau. Steps should certainly be taken to deal with them and the association is wholeheartedly and unequivocally in favor of attacking the problems in an effective and positive manner. I have already related a step which the association itself has taken in respect to an area of abuse which falls under its jurisdiction.

The foreign committee of the association, however, believes in all seriousness that it must caution the committee that the attempt to get at the tax evaders by impossing restrictions on the right to do business may actually cause such serious damage to our balance of payments as to be out of proportion to the potential recovery of funds and fines from the tax dodgers or the criminal elements.

Moreover, at this point at least, we are not at all sure how effective the proposals would actually be in preventing the abuses which they are intended to reach. I suggest, therefore, careful study to the overall effect of the proposals be given by the committee.

The foreign committee is also concerned with the additional recordkeeping and reporting requirements which could be imposed upon broker-dealers by certain provisions contained in the bill.

The committee feels that a more effective approach to the problem would be to set up a system of checking remittances into and out of the country such as was used during the war by the Federal Reserve Bank of New York.

The National Association of Securities Dealers is not unwilling to enact a rule directing brokers and dealers to make all payments to or received from any foreign financial institution through the intermediary of a designated recordkeeping institution and we suggest this approach as an alternative.

A designated recordkeeping institution could be a bank which qualifies as such pursuant to regulations promulgated by the Secretary of the Treasury.

Such an approach would eliminate the broker-dealer community from being possible carriers and would centralize the recordkeeping responsibility with designated recordkeeping institutions.

It seems to us that such a procedure would make enforcement more effective and that such records could more easily be inspected and individual transactions traced than if all broker-dealers were required to keep records, in addition to those already required to be kept.

Such a rule would have to exclude settlement of transactions concluded by broker-dealers between non-United States institutions of non-United Stated broker-dealers as those transactions do not come under the intent of the proposed bill.

The foreign committee believes that such a rule with the complementing policing activities of the Internal Revenue Service would act as a strong deterrent, close a lot of loopholes and achieve the purposes of the bill without damage to our balance of payments.

Also, I know you are aware of the fact that on May 12 of this year the Treasury Department announced that American taxpayers who keep bank accounts in foreign countries will be required to disclose that fact on their 1970 income tax returns.

The association is completely in favor of this requirement and I believe that it alone will have a strong deterrent effect because there will be many, otherwise willing to take a chance, who will have second

thoughts before they would undertake another criminal violation by failure to disclose the existence of such an account or accounts.

In addition to favoring the IRS's requirement to disclose foreign accounts on income tax returns, the association wholeheartedly supports those provisions of the bill which would require reports to be filed by individuals who knowingly transport into or out of the United States currency and other monetary instruments which, as noted, would include bearer bonds and stock transferable by delivery.

We believe such requirements will have a strong deterrent effect. We also favor that provision of the bill which would require individuals to file reports of transactions with foreign institutions with the Securities and Exchange Commission.

In closing, I would like to make a point which may have escaped you. The years 1969 and 1970 have brought serious losses to the securities industry and its investor clients here as well as abroad. People who have tried to avoid taxes by buying their securities abroad may have been doubly punished. Initially, they have lost a very large part of their money and, secondly, they have foreclosed the possibility of offsetting their losses against possible profits.

We seriously urge that your committee go no further than imposing the suggested recordkeeping requirements for banks, requiring reports of funds leaving or coming into this country and requiring reports by individuals effecting securities transactions with foreign financial institutions.

This approach has the virtue of avoiding the risk of creating a situation where foreigners become perturbed not only to the point of widespread selling of their American securities but of converting the dollar proceeds to boot.

I would like to read and ask that there be inserted in the record the language of a cable which I received from Mr. Froy yesterday afternoon, and I will read that and submit it for the record, if I may:

Major European banks have since a long time refused to open accounts for U.S. persons if their nationality is known to them. Frequently they do not know the nationality of their clients. For tax reasons their interest is limited to their clients' residence. Also, they are not always promptly informed of any change in their clients' residential stature.

Large institutions in Great Britain, France, Switzerland, Germany and Italy whom I visited during the last three weeks decided to reduce their business in U.S. securities to an absolute minimum should S. 3678 be enacted in its present form and are already advising their clients accordingly.

They do not wish to give any wrong information, but might be caught when receiving an order from a third party who may in turn, unknown to them, act for U.S. or partly U.S. interests.

They adhere strictly to their domestic laws, but do not want to come under U.S. jurisdiction. It was uniformly stated to me that this proposed bill if enacted will be a permanent deterrent to foreign banks, institutions and brokerdealers for buying U.S. securities or suggesting such purchases to their clients. Countermeasures are already being discussed. These may affect or completely arrest the placing of U.S. dollar bonds abroad or it may lead to conversion of the Eurodollar holdings at an early date. One or both of these actions would be disastrous for our balance of payments.

There is a general feeling that income tax evasion problems are a U.S. responsibility at hime and ot theirs. This view was expressed to me not only by banks up to state bank levels but also by various interested government departments in these countries.

I submit that for the record, Mr. Chairman. (See p. 309.)

Senator PROXMIRE. Thank you very much, Mr. Wilson. As I understand it, to the extent that you feel these questions should be answered

by Mr. Froy, you will simply deter them, and then when your remarks are corrected, you can answer them in any way you wish.

Mr. WILSON. Yes.

Senator PROXMIRE. Senator Bennett.

Senator BENNETT. Mr. Wilson, it seems to me Mr. Froy's testimony would suggest two alternatives:

(1) Set up a system of checking remittances in and out of the country, and

(2) To set up a system under which a recordkeeping institution could act as the central point to collect the information.

Those are two different alternatives; are they not?

Mr. WILSON. It is essentially the same. I believe the recordkeeping institution would be the institution through which the remittances would flow, and I believe the suggestion is based primarily upon the fact that most securities and funds, which are presently handled by U.S. brokers, in respect to foreign institutions presently do go through domestic banking channels on their journey abroad.

Senator BENNETT. Your statement at the beginning makes a very eloquent plea for the preservation of the free flow of money and securities in international channels. If this were set up officially, would this be interpreted abroad as the first step in a restriction of this free flow?

Mr. WILSON. I think not; I think the foreign institutions, insofar as I am informed, do not oppose the imposition of recordkeeping requirements in this country. I think what they do oppose and object to is the imposition of requirements upon them as a result of requirements placed upon U.S. citizens, to wit: A requirement that they certify a given transaction is not on behalf of a U.S. citizen. I think they fear that if they make a mistake and unknowingly so certify in respect to a person who is a U.S. person and that person is subsequently discovered, that there might be some overlapping or resulting effect on that particular institution, perhaps unwarranted, perhaps to the extent of restricting further transactions.

I will concede this type of fear probably is unwarranted, but it is apparently real.

Senator BENNETT. You heard Mr. Haack's testimony and the succeeding discussion about the developing markets for American securities in Europe. Do you have any comment to make on that?

Mr. WILSON. As to the effect of these provisions on the developing markets in Europe? I think it would be Mr. Froy's strong position, and I believe the telegram would so indicate, that he feels it would have a detrimental effect on the business of U.S. broker/dealers with foreign institutions.

Senator BENNETT. That was not quite my question. I have the message from Mr. Froy's telegram very clearly. But Mr. Haack suggested that the foreign exchanges are building up subsidiary markets for the buying and selling of American securities that never reach the American markets.

Do you have any comment on that?

Mr. WILSON. Yes; I am sorry, I missed your question.

I would like to defer on that to the Foreign Committee. I think it can supply some very good comments in that respect.

Senator BENNETT. Thank you very much.

Senator PROXMIRE. Yesterday, Mr. Wilson, we heard testimony that U.S. citizens frequently have arrangements with their brokers whereby they can call the broker to execute a securities transaction in the name of their secret foreign bank account. The broker subsequently calls the foreign bank to complete the transaction. Is this procedure a violation of NÄSD rules and regulations?

Mr. WILSON. I should think it would be.

Senator PROXMIRE. You think it

Mr. WILSON. I should think it would be, yes.

Senator PROXMIRE. Has the NASD detected any cases where this type of arrangement has been going on?

Mr. WILSON. I know of no case where it has uncovered such a situation. I do not say it does not exist.

Senator PROXMIRE. What penalties or sanctions would the NASD impose if it detected a broker accepting an order under these circumstances?

Mr. WILSON. I can only answer that by giving the outside limits of the penalties which can be imposed by the Association. The Association can impose fines, suspensions from membership for a period of time or expulsion from membership. I think it is fair to say that expulsion from membership or a revocation of an individual's registration is tantamount to putting him out of business.

Senator PROXMIRE. What do you think of this situation? This is the next witness, what he has to say: "As mentioned above, on the short side the Swiss bank must carry a short account with a broker in the United States.

"Here again let me emphasize that the account is carried in the name of the Swiss bank. Typically, the American broker will accept orders from me followed by cable confirmation of the Swiss bank. Here, however, since short sales are involved, there are no deliveries," and so forth.

"Let me emphasize that the account is carried in the name of the Swiss bank. Typically, the American broker will accept orders from me followed by cable confirmation by the Swiss bank."

Would you say that would constitute a violation?

Mr. WILSON. I think it would depend on how the broker carried it on his books. If he reflected all of those facts on his books, I do not think there would be a violation. If the purpose of that arrangement was not to disclose his identity and the broker/dealer assisted him in doing that and did not properly reflect the purchaser whom he knew about on his books, I should think it would be a violation, and I feel certain it would be construed as such.

Senator PROXMIRE. You indicate you are worried about greater disclosure on foreign transactions that would impair foreign confidence. Isn't the opposite more likely? If we permit our markets to be manipulated through secret foreign bank accounts, would not foreign investors lose confidence in these markets?

Mr. WILSON. I think to the extent that any market is manipulated and there is a detrimental effect on the market as a whole, there would result some loss of confidence.

Senator PROXMIRE. Mr. Haack testified to the destabilizing force of violating our margin requirements by using foreign sources for funds.