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In this supplemental testimony I would like to make on more substantive point in favor of eliminating Title III from this Bill and elaborate on several questions that were raised on the morning of June 11th, 1970 when I testified. Margin Requirements Should Not Be Applied American Borrowers for several

of the Same Reasons Applying to Foreigners The most important argument against attempting to apply margin regulations to foreigners is that it would curtail their investing in this country and thus harm our balance of payments. Similarly, to the extent Americans are prevented from borrowing abroad, our balance of payments would also suffer. Americans would not only curtail borrowing not conforming with U.S. margin requirements but also other, conforming borrowing, because neither the American borrower nor the foreign lender could absolutely be certain that the very complex U.S. margin requirements were being complied with.

A second reason for not applying margin requirements to foreigners is that it would exacerbate our relations with such foreigners, who would feel that their domestic sovereignty was infringed upon. The consequences would clearly not be so severe as applied to Americans, but American dealings with foreigners would be curtailed and, therefore, an opportunity to promote better relationships would be missed.

The third major reason for not subjecting U.S. foreigners to U.S. margin requirements is that it would be very difficult to enforce such regulations. But the law would be almost as difficult to enforce among Americans borrowing less than $1 million abroad, because it would be necessary for the government to prove that any such person obtained the credit "in willful and knowing violation of any rule or regulation under this section".

In brief, this country should be willing to give up the little added stability that might be provided our stock markets by broader margin regulations, in order to gain other ends that are more important for the nation as a whole. Comments on Three Questions

1. Senator Proxmire asked the question as to why more Americans do not have Swiss banking accounts than I believe do. My answer left out the most important reason, which is that Americans are generally not interested in ob. taining higher margins than are available here.

Sophisticated investors are aware that unhedged margin buying can com. pound losses as well as gains and, therefore, are generally not strongly attracted to it or to the intricacies of hedging. The unsophisticated, who often don't realize that margin buying is a two-edged sword, are not easily attracted abroad because there are additional commission and interest expenses and because it is illegal for most of their fellow Americans to induce them to borrow abroad.

2. Senator Proxmire made a statement—which was more of an observation than a question—that the higher expenses of doing business in Swiss banks could increase the pressure to make money in the market and, therefore, encourage speculation.

Speculation is undesirable in so far as it involves people buying stocks with money they should not prudently have in the market. But speculation is immensely desirable and helpful to our economy when it involves people with the financial, intellectual and psychological qualifications to take large risks. In that sense I regard myself as a speculator. On both the long and short side I am involved with speculative securities. On the long side I always buy stocks that, if things work out, will be immensely profitable, but if misfortune occurs, will generate large losses. But I protect myself by shorting stocks that are also speculative but which I feel have meretricious values.

I respectfully submit, therefore, that the type of speculation that I do serves an important economic function. It buoys the price of those companies which I think are deserving of greater recognition and tends to exert pressure on those companies which are being overrated by the public. Thus, to a very small degree I am encouraging capital and able men to flow into good young companies and out of the unsound ones.

3. Senator Proxmire asked Mr. Wilson, representing the NASD, whether the execution of an order by a U.S. brokerage firm for a Swiss bank, but given by an American in this country, would conform with NASD rules, so long as the order was subsequently confirmed by cable from Switzerland. Since this is the operating

procedure that I usually follow, I should like to take the liberty of commenting on this question.

If the Swiss bank gave the broker with whom I dealt a power of attorney, giving me authority to place orders for the Swiss bank, there would be no question that the New York broker would be complying with all NASD and New York Stock Exchange regulations. Similarly, if the broker received the cable from the Swiss bank before executing the order, even without any power of attorney to me, there is again no question that he would be conforming with all NASD rules.

The question only arises, therefore, when the broker accepts my order before having any written evidence of his authority to so accept my order. Most brokers, nevertheless, are willing to do this with me because they know me and are willing to take my word that I have the authority to place the order for the Swiss bank, and understand that it would be a heavy burden on the part of the banks to send powers of attorney to the numerous brokers that I deal with. I also make clear to the brokers that I have a substantial interest in the Swiss bank account and that, to the best of my knowledge, there is no violation of U.S. laws.

The brokerage business is based on trust. Whenever an individual places an order to buy a stock, the broker tacitly assumes that the individual has the funds with which to finance a purchase or the stock with which to make delivery on the sale. It is part of that trust for a broker, who knows me, to accept my word that I have the authority of the Swiss bank to execute an order and that, if for any reason there is a misunderstanding with the Swiss bank, I would make good on the order directly.


Washington D.C., July 13, 1970. Hon. WILLIAM PROXMIRE, Chairman, Subcommittee on Financial Institutions, Banking and Currency Com

mittee, U.S. Senate, Washington, D.C. DEAR SENATOR PROXMIRE: When our client Robert W. Wilson testified on the question of whether S. 3678 should include the proposed amendment to section 7 of the Securities Exchange Act of 1934 to prohibit U.S. borrowers from using foreign credit obtained on more favorable margin limitations to finance securities transactions, he pointed out that American policy has encouraged international business and that many U.S. business people carry on operations under foreign law to get more favorable terms.

The attached article shows one phase-American companies who seek more favorable labor laws abroad. No one has proposed denying these companies the right to avoid restrictive U.S. laws, and the same principle would seem to apply to U.S. investors—freedom to borrow money on the most favorable terms anywhere in the world. Sincerely yours,


[From Business Week, July 11, 1970]


Like many other U.S. companies, Zenith Radio Corp. is wising up to a painful problem. In the words of Chairman Joseph S. Wright, it is a victim of "an organized assault by our Japanese friends." The assault has been so successful that last year less than 2% of portable radios and only about half the black and white television sets sold in the U.S. were American-made. Now Zenith is responding the same way most other American electronics companies already have. It is building its first Asian plant where labor is cheap—Taiwan. Even the Japanese hunting for cheap labor, too, have been putting up electronics plants there.

Zenith’s venture joins a long list of U.S. companies pouring investment capital into Taiwan. So great is the rate lately that the country boasts the fastest growth rate next to Japan in Asia with the gross national product increasing 8% per year. In the last decade, more that 475 foreign corporations have put $433-million to work in Taiwan. Most of this money came from the U.S. ($234.5-million) and Japan ($116.4-million) and most of it was spent by electronics companies. In the first four months of 1970, foreign companies committed another $22.4-million. And nearly $100-million worth of electronics products were made last year in Taiwan.


To date, Admiral, Motorola, Philco-Ford, Bendix, Arvin, RCA, Consolidated Electronics, Clinton, TRW, Texas Instruments, IBM, and Ampex among others have set up shop in Chiang Kai-Shek's refuge, following General Instrument Corp., the first big U.S. electronics company to build in Taiwan only six years ago.

The island is far from being a pure gold mine for U.S. companies. For one thing, a state of war still exists between it and mainland China. Other drawbacks, for U.S. businessmen, range from dysentery to the beer (with a taste like fermented soy saauce) brewed by the government's Tobacco & Wine Monopoly.

What makes Taiwan the momentary mecca it has become is, of course, the cheap labor supply. Wages are half those in Hong Kong, a third of Japan's, a tenth of West Germany's, and a twentieth of those in the U.S. Unskilled Taiwan workers earn a piddling $30 per month, and skilled workers seldom top $50 a month. The thriving electronics plants rely on women, who earn even less. Per capita income in Taiwan is only $258.

There are drawbacks to cheap labor, however. Illiteracy is fairly high despite compulsory education through grade school. Over 22% of the population cannot read and write. And since Taiwan is still basically an agricultural country where the family unit is very strong, absenteeism and a high turnover rate are common.


“Last year it was textured stockings," complains the manager of one U.S. electronics plant. “The girls would quit as soon as they had enough extra money to afford them. As long as someone else in the family was working, that was considered okay." Unions offer little problem, since strikes are outlawed because of the state of war that exists. The war has resulted in another source of manpower: soldiers who came to the island with Chiang in 1949 and who are now retired from the army and looking for jobs.

Besides its labor pool, Taiwan offers foreign companies other bait: a five-year holiday from income tax and low taxes thereafter; unlimited remittance of earnings; 100% foreign ownership; and duty-free import of most material and machinery. The government offers other concessions such as low-interest loans for up to 70% of the value of a plant, and free transportation of goods to and from cargo ships. By 1972, the government expects that “Made in Taiwan" will be stamped on $600-million worth of electronics products, six times as much as today.

Senator PROXMIRE. The hearings are now adjourned. The record will remain open until June 19.

(Whereupon, at 11:40 a.m., the hearing was adjourned.)


Additional Statements and Material Submitted for the Record


The Subcommittee on Financial Institutions recently held hearings on two bills, S. 3678 and H.R. 15073, which while differing in detail are both intended to curtail the misuse by U.S. citizens of secret foreign bank accounts. The Association of Stock Exchange Firms agrees wholeheartedly with the basic purpose of these measures. Certainly we write no brief for those who invoke the cloak of secrecy to cover evasion of our tax or securities laws or to facilitate illegal activities in this country. However, the pending bills may unintentionally impede legitimate international financial dealings and burden the stock brokerage business in ways which are all out of proportion to any possible strengthening of the Government's ability to detect and prosecute criminal conduct.

During the course of the Subcommittee's hearings, testimony was received from representatives of the New York Stock Exchange and the National Association of Securities Dealers, Inc. Both of these agencies have major responsibilities for self-regulation of the securities industry under the Securities Exchange Act of 1934. As such, they are in a position to understand the unique problems of surveillance and enforcement within this industry, and we commend their testimonies to your most careful consideration.

While stating once again our support for the objective of such legislation, we are particularly concerned with Title IV of S. 3678 which would amend the Securities Exchange Act of 1934 by adding a new Section 31(a). This provides in substance that a U.S. broker-dealer may not effect any transaction in a domestic security initiated by a foreign financial agency unless (1) that agency has disclosed to the broker-dealer the identity of all persons having any beneficial interest in the transaction, or (2) the broker-dealer has accepted in good faith the agency's certification that no U.S. citizen or resident has any beneficial interest in the transaction.

We strongly endorse, but for the sake of brevity will not reiterate here, the comments of the Exchange and the NASD as to the potential adverse effect of those requirements on the Nation's international balance of payments, as well as the Exchange's more novel argument that they will spur the growth of foreign trading markets for U.S. securities. It is our belief, however, that this provision may both be unworkable from a practical standpoint and impose an unfair burden on securities firms.

Proposed Section 31 (a) may be unworkable because certain foreign financial agencies may refuse (and may, in fact, be required under local law to refuse) to divulge the identities of persons having beneficial interests in such transactions. In addition, the institution itself may not know the identiies of all persons having such a "beneficial interest.” As can be appreciated, the quoted phrase is very broad in its legal import, and there is no requirement, even under our own industry's admonition to “know your customer," which would necessitate the identification of every person having such an interest. Such an inquiry would sometimes be impossible and often onerous and time-consuming. The requirement of Section 31 (a) (1) might, therefore, impose such severe administrative and legal burdens on foreign financial institutions that they would simply prefer to take their business elsewhere.

In some respects, this reasoning also applies to the alternative proviso of proposed Section 31 (a) (2). Here, however, the onus falls on the U.S. broker-dealer. and we suggest that it is essentially an unfair one. It has been suggested, and we think rightly so, that it is questionable whether a U.S. securities firm could ever accept such a certification, whether on a blanket or transaction-by-transaction basis, in “good faith” from, for example, a Swiss bank because the firm

(335) 46-824-70


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