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which raise questions whether their impact on our securities markets was the result of proper or improper activities.

Even in the investment company area, we have come across situations where foreign depositories have been used to the disadvantage of public investors.

In one case, large deposits were made with certain foreign banks by a company which was subsequently determined to be an investment company. These deposits were further obscured by the subsequent use of these moneys by one of the banks for loans to other foreign intermediaries whom we believed were affiliated with principals of the investment company.

Some of the money so deposited was ultimately returned to the corporation, apparently in large part as a result of prompt Commission action. However, it appears extremely doubtful that the balance of the money will ever be recovered. The balance was transported to a foreign country by personal courier, ostensibly for deposit in a branch of a certain bank.

The bank records, however, failed to disclose that the money was ever, in fact, deposited. It is interesting to note in this connection that we learned, as a result of the subsequent bankruptcy of the parent bank, that the money apparently never made its way to the branch and that the parent bank and its branch frequently employed fictitious accounts for the purpose of establishing the existence of deposits when in fact none existed. To this date, the ultimate destination of the balance remains a question.

Senator PROXMIRE. Could you tell us the name of the bank in this case?

Mr. BUDGE. It is the Germann Bank.

We would next like to make a few remarks about the avoidance of the Federal Reserve Board's rules for the regulation of purchases of securities on credit, through the use of foreign financings.

As we mentioned a few minutes ago, the recent contest for control of MGM illustrates how large sums are being obtained abroad for the purchase of American securities on terms which are not permitted by the margin rules. In the MGM case, we understand, American lenders would have required over three times the collateral that the foreign banks did. The problem as we see it is twofold.

First, it may be contended that, under the existing margin rules, as interpreted by the Federal court in the MGM litigation, foreign lenders can make loans to Americans for the purchase of securities in American markets on any terms they care to.

Obviously, to the extent that the margin rules attempt to prevent unwise market credit extension and "pyramiding," the extension of credit by foreign lenders without regard to the margin restrictions defeats these objectives.

Second, we have the problem of policing the margin rules as to the activity of domestic lenders, who may disguise their participation in transactions with American companies by placing them through for eign intermediaries. We found that some foreign entities, in certain instances, opened and maintained special omnibus accounts with American brokerage firms for American customers, who used them to evade the clearly applicable margin rules.

We suggested that such accounts be restricted to American firms. and last year the Federal Reserve Board limited the availability of

such accounts, which should stem this type of illegal activity. However, the evasion of the margin rules through other types of transactions is still possible unless we have the means necessary to get behind the facade provided by foreign intermediaries.

Because obtaining information on securities transactions coming through foreign entities has been so very important to us in carrying out the responsibilities that the Congress has placed on us under the Federal securities laws, this Commission has been in the forefront of those attempting to obtain all relevant information concerning foreign entities involved in any of our cases.

While we have had some success in obtaining information in certain cases, as indicated above, by and large we have been thwarted more often than not. The problem is that we have been unable to obtain the information we need on any regular basis. In a few cases, foreign authorities have been able to be helpful to some extent, but in most cases where information has been obtained it has only been made available after a considerable lapse of time.

Measures applicable to American citizens and residents, and, in certain instances, persons doing business in America, which help us obtain more information concerning these kinds of transactions, together with treaties or international agreements which would secure the cooperation of foreign governments in our investigatory efforts, are most desirable.

We appreciate that some foreign institutions may oppose any actions which would make it more difficult for them to wrap the cloak of secrecy about questionable financial dealings. However, we believe that responsible foreign financial agencies and investors should support such actions because it is in their best interest to preserve the fairness and honesty of America's securities markets.

We know from experience that it is the confidence in the integrity of our markets, as much as it is the strength of our economy, that has been responsible for the extensive foreign trading and investment in the stocks and bonds of American companies.

We welcome any reasonable measures which will be of assistance to us in dealing with the problems described above and thus be of help to us in continuing to protect the investing public by enforcing full disclosure in connection with public offerings of securities, as well as detecting and preventing evasion of the antimanipulative, antifraud, and other applicable regulatory provisions designed for public investor protection.

To the extent that the provisions of S. 3678 will discourage Americans from making use of foreign banks and financial institutions for unlawful purposes, or enable Americans who may do so to be more readily identified, it should be of assistance to agencies such as the Commission in carrying out their enforcement and regulatory duties. At the same time, as I have said, we are desirous of encouraging legitimate foreign investment in our securities markets; it is only the illicit practices that we wish to inhibit and eliminate.

We wish to thank you very much for the opportunity to appear here today, and if you have any questions concerning this matter, we will endeavor to answer them now to the best of our ability, or undertake to provide you with the answers at a later date.

Senator PROXMIRE. Chairman Budge, I think this is a useful statement, and I am delighted you have put this in the proper perspective.

Both in the beginning and in the end you talked about welcoming foreign investment, which all of us do. We would be in even worse shape on our balance of payments if we didn't do that, and this is a constructive action on the part of the foreigners who want to invest in our country.

In your statement, you say:

Cases such as the foregoing are not at all unusual, and they suggest that hundreds of millions of dollars are being furnished annually by foreign sources to assist in endeavors to gain control of American companies.

In the first place, these may not be foreign sources in the sense they may be foreign persons. These could be American citizens, they could be criminal elements in America who are taking over companies by using the concealment of foreign bank accounts that is one possibility. Another, as I understand it, is it may be people which you indicate very well in your statement who are violating the antitrust laws.

You gave a very good case where we had one instance where a company was prohibited from a takeover because of a violation of the antitrust laws, and then it proceeded to use the foreign source, which could very well have been the same people involved.

Mr. BUDGE. That is correct.

Senator PROXMIRE. Do you know whether or not there has been any interest on the part of those responsible for enforcing our security laws, not the securities laws which you enforce but our military security laws? It would seem to me that a foreign country that wanted to get defense information that was classified and that would be very valuable to them, instead of the usual cloak and dagger stuff, could buy a position on the board of a big defense contractor through using its secret account and conceivably get information in this way. I just don't see any reason why that wouldn't be a manner of achieving this smoothly and probably rather economically.

Mr. BUDGE. I would certainly think it is a very definite possibility, Senator.

Senator PROXMIRE. And securing a substantial dividend perhaps in the process.

Your statement does concern me to this extent. It is an informative statement, but it seems to me it is somewhat inconclusive. Are you for the legislation, S. 3678, or are you against it?

Mr. BUDGE. We are for the legislation, Mr. Chairman, insofar as it would assist us in performing our law-enforcement functions. There are some areas where we would of necessity have to defer to the Congress and to other branches of the Government in weighing the benefits to enforcement against the burdens imposed.

Senator PROXMIRE. You think it would strengthen your ability to enforce the securities laws?

Mr. BUDGE. Yes, sir.

Senator PROXMIRE. Your only hesitation is that you can't endorse every last part of it because you feel part of it is beyond your responsibility?

Mr. BUDGE. Well, as the chairman indicated, if the legislation went so far as to inhibit foreigners from purchasing securities in this country, we would feel that should be weighed by the Congress and the other agencies of the Government in determining whether or not the legislation should be enacted.

Senator PROXMIRE. In your judgment, does this legislation go that far, would it inhibit legitimate investment by foreigners?

Mr. BUDGE. I really don't feel qualified to answer, because I don't know to what extent it would inhibit investors from abroad.

Senator PROXMIRE. If you have any feeling on that, any specific proposals that could correct that kind of inhibition, I would appreciate getting it because we would like certainly to eliminate that just as you would.

Ünder title IV of S. 3678, the Senate bill goes beyond the House bill by prohibiting U.S. brokers from accepting securities orders from foreign banks unless the foreign bank discloses the party for whom it is acting or certifies it is not acting for a U.S. citizen or resident.

What impact will this provision have on the enforcement of our securities laws?

Mr. BUDGE. I think that would be very helpful, Mr. Chairman. I think something else that the committee might consider is expanding that disclaimer so that the foreign entity would have to disclaim not only that the transaction is not by an American citizen but it is not violative of the laws of the United States, including, of course, the margin requirements.

Senator PROXMIRE. It can be argued that such a requirement is a totally new and unjustified attempt to regulate foreign banks. Do you think it is unjustified or within precedence for this type of a requirement?

Mr. BUDGE. In the field of foreign affairs, Mr. Chairman, I think I would prefer to defer to other agencies of the Government.

Senator PROXMIRE. Another possible objection to title IV is that it may reduce foreign investment in the United States, to which you have alluded. In your statement, you have emphasized the positive impact of such legislation in the sense that it promotes greater foreign confidence in the integrity of our securities market.

On balance, do you think title IV would have a beneficial or an adverse effect on foreign investment flows?

Mr. BUDGE. I would again wish to defer that to Congress and the other agencies of the Government.

Senator PROXMIRE. What other agencies? We have great confidence in you and your agency. You are an expert in this field.

Mr. BUDGE. Again, I just don't know to what extent that would inhibit participation by foreigners in our markets.

Senator PROXMIRE. Would you refer to the Treasury and their judgment?

Mr. BUDGE. That would be one of the agencies, certainly, probably the main one in the executive branch of the Government.

Senator PROXMIRE. Can you assess the positive impact of greater confidence that this would engender?

Mr. BUDGE. I think, Senator, anything which can be done to emphasize and reemphasize the stability, the fairness of the American. marketplace, should be done, whether it is with our own citizens or with persons abroad, so that we can point to our markets as being the finest markets in the world, which they are, and the marketplaces of the world which come the closest to providng an honest product at an honest price.

Anything that can be done to enhance that image I think the Commission would wholeheartedly support.

Senator PROXMIRE. Title III of S. 3678 extends penalties for violating margin requirements to the borrower as well as to the lender. Do you support this?

Mr. BUDGE. I should say we do. We are a five-man commission.

Senator PROXMIRE. We had some very interesting and useful testimony from Mr. Seymour earlier in which he had the distinct feeling that the ability of those who used foreign bank accounts to evade margin requirements could have an unsettling effect on the market. Would you subscribe to this view?

Mr. BUDGE. I would.

Senator PROXMIRE. And it could have a significantly unsettling effect in your view, is that correct?

Mr. BUDGE. Yes, I think so.

Senator PROXMIRE. It has been suggested that the penalties apply to the borrower only insofar as he borrows abroad. If he borrows domestically, the penalties would only apply to the lender as they do now under the existing law.

Can you comment on this proposed modification of S. 3678?

Mr. BUDGE. I have not specifically considered that, Mr. Chairman, nor has the Commission. I see no reason for the distinction, no apparent reason at the moment.

Senator PROXMIRE. Wouldn't it be easier to enforce the domestic law if you could get at the borrower as well as the lender?

Mr. BUDGE. I am sure that it would be.

Senator PROXMIRE. The House bill extends penalties to the borrower for violating the margin requirements if the borrower makes a "material misrepresentation" to the lender concerning the purpose

of the loan.

Under the Senate bill, a borrower is guilty only if he willfully and knowingly violates the margin requirements. Can you comment on which of these two approaches you would prefer?

Mr. BUDGE. I think we would prefer the disclosure approach which is in the former.

Senator PROXMIRE. Which is the former, the House bill version?
Mr. BUDGE. Yes.

Senator PROXMIRE. How frequently are foreign bank accounts involving in cases involving manipulation of individual securities?

Mr. BUDGE. Well, we just don't know the frequency. We suspect that it happens rather frequently, but we are unable to pursue our investigation to the length to actually prove it in a lot of cases.

Senator PROXMIRE. How about your computer kickouts, does that give any indication how frequently these situations reflect foreign holdings?

Mr. BUDGE. We can determine that something has happened from the tolerances in the computer and that it is something we would like to look into, but as we go down the line to try to find out where the securities went and who got the money, if it runs into a foreign intermediary, that is the end of the trail.

Senator PROXMIRE. I understand that, but I wondered if the SEC had made any study of the ones where there are irregularities in which the computer indicates there is something suspicious that should be investigated, how often do you run into foreign holdings?

Mr. BUDGE. If I may, I would defer to Mr. Pollack, who is the director of our Division of Trading and Markets, as to that.

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