That is one element. We have a big mutual fund which recently had to liquidate substantially. Many people feel that was a factor in the recent sharp drop in the stock market.

It is conceivable that on the kind of large scale that these foreign investors deal it could result in a market manipulation that would tend to destroy foreign confidence, is it not?

Mr. WILSON. As I say, if there is manipulation, to some degree, there is a destruction of confidence. However, with respect to whether that situation would ultimately result in the destruction of confidence or whether some of the provisions in this bill would, I would have to defer to Mr. Froy who has within the last 3 weeks spoken directly with a number of institutions in five countries, and I would think that his comments perhaps at a later date and in greater detail might be very appropriate for this committee.

Senator PROXMIRE. It seems to me I could argue that failure to pass this legislation would have as destabilizing an effect or adverse effect as the warning that you gave us on the reactions in Europe if we pass this legislation.

Mr. WILSON. I do not think that the Association or Mr. Froy or the Foreign Committee would say do not pass this legislation. I think they are saying do not impose the requirement that the foreign bank have to certify that his customer is not a U.S. person. I think the foreign banks feel this is imposing upon them U.S. law.

Senator PROXMIRE. The figures for 1968 indicate that $9 billion in stock transactions originated in Switzerland. How much of that is $9 billion in foreign money comes from U.S. citizens?

Mr. WILSON. I have no idea, Senator.

Senator PROXMIRE. Any estimate?

Mr. WILSON. I have no idea personally. I would attempt to supply it for the record if I can get such a figure.

Senator PROXMIRE. Don't you think you ought to have some kind of tools such as this legislation provides so that we could have some notion?

Mr. WILSON. Yes, sir.

Senator PROXMIRE. Some broker/dealers seem to do an inordinately high volume of their business with Swiss banks. According to a survey we conducted, one broker does about 85 percent of its business with Swiss banks. Do you see anything unusual or suspicious about this? Mr. WILSON. In and of itself, no. That may be the nature of that particular broker/dealer's business. I do not know the type of business he does or any of the other details. But in and of itself I would have to say no.

Senator PROXMIRE. You say in and of itself; it may not be suspicious, but in and of itself you say this would not constitute an indictment, rather it may be a red flag for further inquiry?

Mr. WILSON. Perhaps a red flag, but in and of itself, I'd have to

say no.

Senator PROXMIRE. Thank you very, very much.

(The prepared statement and cablegram of Mr. Froy follows:)

STATEMENT OF HENRI L. FROY, CHAIRMAN, FOREIGN COMMITTEE, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

My name is Henri L. Froy. I am Chairman of the Foreign Committee of the National Association of Securities Dealers, Inc. and a general partner in

Abraham & Co., a broker in domestic and foreign securities, and a member of the New York Stock Exchange and the Association. The remarks contained herein reflect views of the Foreign Committee and represent the position of the Association in respect to S. 3678. Initially, I would like to express the Association's appreciation for being extended this opportunity to appear before your Committee and offer these comments.

The National Association of Securities Dealers, Inc. is a nationwide, selfregulatory organization created as a result of an act of Congress and is composed of 4,385 broker/dealer members. It also has registered with it, and has supervisory and regulatory responsibility for about 178,000 salesmen and management personnel employed by those broker/dealers. It is important to emphasize that the Association is a regulatory body rather than a trade association and this Committee can be assured that the Association willingly and aggressively asserts that distinction and accepts all of the duties and obligations and asserts all of the powers inherent in its designation as such. Its purpose is to protect the public interest and it does this by enforcing standards of ethical conduct on its members and those registered with it.

By way of background, the Association was organized in 1938 and it receives all its authority from the Maloney Act which was enacted in that year for the purpose of completing the federal regulatory scheme in the securities industry by providing a regulatory mechanism over the ethical standards of broker/ dealers in the over-the-counter securities market. That area was not previously the subject of close regulation. The Association is, therefore, an integral part of the overall system of federal securities regulation.

The Association has testified frequently before committees of the United States Senate and the House of Representatives in respect to legislation affecting the securities industry, including the Interest Equalization Tax Act in connection with which the Foreign Committee of the Association was particularly interested and which was subjected to close study by it. The Association, subsequently, has cooperated closely with the United States Treasury Department and offered its advice and assistance with reference to enforcement of certain of the provisions of that Act. Similarly, the Association has worked closely with the Treasury Department on technical problems in connection with proposed legislation especially in connection with the extension of that Act in 1969 when the Association imposed a requirement upon its members to continue to adhere to its provisions during the interim if the extension act was not finally approved before the expiration date of the earlier Act. I am sure Treasury officials will corroborate that our counsel, our enforcement and our supervision has been helpful and effective.

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 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 record-keeping 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 United States broker/dealers from effecting transactions in United

States 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 United States citizen or resident. Secondly, the bill would require United States 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 United States broker/dealer with whom the transaction is ultimately effected. As explained by Senator Proximire 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 United States 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. 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.

We are fully aware of the bill's intent in requiring statements from foreign institutions before a domestic broker/dealer can do business 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 fructified and 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.

Gentlemen, we have a most serviceable international financial mechanism. It is constantly being improved and refined as witnessed 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 United States 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 imposing 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 record-keeping 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 thorugh the intermediary of a designated record-keeping institution and we suggest this approach as an alternative. A designated record-keeping institution could b ea 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 record-keeping responsibility with designated record-keeping institutions. It seems to us that such a procedure would make enforcement more effective and that such records would 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 or non-United States 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 damagto 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 record-keeping 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.

Thank you very much.

CABLE RECEIVED FROM MR. FROY

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 broker/ dealers 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 Euro dollar 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 home and not their's. This view was expressed to me not only by banks up to state bank levels, but by various interested government departments in these countries.

Senator PROXMIRE. I understand that the next scheduled witness is not available, and so we have one last witness, and we are delighted to welcome Mr. Robert W. Wilson-this is Wilson day before the Banking Committee of Wilson Investments, accompanied by Carl Shipley, a distinguished Washington resident and friend of the committee.

Mr. Wilson and Mr. Shipley, we are delighted to have both of you gentlemen, here.

STATEMENT OF ROBERT W. WILSON, ROBERT W. WILSON INVESTMENTS, NEW YORK, N.Y.; ACCOMPANIED BY CARL L. SHIPLEY

Mr. WILSON. I want to thank you very much for giving me this opportunity to testify today. I am a private investor who has had Swiss bank accounts for a number of years.

Senator PROXMIRE. May I just interrupt to say, Mr. Wilson, that your entire statement will be printed in full-it is a very detailed statement; you take your time-including the attachments.

Mr. WILSON. I have no intention of reading the statement, sir. Senator PROXMIRE. For that reason we will make sure that it is preserved for the record and the entire statement will be printed and you proceed in your own way. (The full statement appears on p. 318.) Mr. WILSON. I have been a professional investor and analyst in the securities business now for almost 18 years. I have, or my wife has had, Swiss bank accounts or other foreign bank accounts for almost 10 years. The main reason we have had these bank accounts is to avoid U.S. margin regulations. For that reason today I am going to confine my discussion to title III.

In principle, I approve the balance of the bill, but I do not know enough about it to comment on it. Furthermore, I am only going to discuss title III as it relates to American borrowers, because that part of the title which applies to foreign borrowers and foreign lenders, I think, is clearly unenforceable and, based upon previous testimony you have heard, clearly unsound.

What I hope to demonstrate is that nobody who has suggested title III should be passed-that nobody who has recommended title III— has presented any good reason for enacting it, and I hope also to review the harm which title III could create.