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lishing the existence of deposits when in fact none existed. To this date the ultimate destination of the balance remains a question.

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 two fold.

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 foreign intermediaries. We found that some foreign entities, in certain instances, opened and maintanied 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 availablity 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 instituions 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 America 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 anti-manipulative, anti-fraud 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. The committee will stand in recess until 10:30 tomorrow morning and reconvene to hear Mr. Rossides of the Treasury Department and other witnesses on these bills.

(Whereupon, at 12:00 p.m., the hearing was adjourned, to reconvene Tuesday, June 9, 1970, at 10:30 a.m.)

(Testimony of the Securities and Exchange Commission before the House Banking and Currency Committee referred to earlier on p. 75 follows:)

FEBRUARY 16, 1970.

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To: Wright Patman, Chairman.
Subject: Investors Overseas Services (IOS) and its use of secret foreign fi-

nancial facilities. Transmitted herewith is a report on IOS, including (1) its background, (2) its sources of revenue, (3) SEC-IOS litigation, and (4) its investment in companies in the United States.

The total net assets of the mutual funds managed by IOS were $1.8 billion at August 31, 1969, of which approximately $1.2 billion or about two-thirds were invested in equity securities of United States corporations. The consolidated net income of iOS has increased from about $1.7 million in 1964 to about $14.7 million in 1968.

Each IOS-managed mutual fund is subject to applicable governmental regulation in the country of its organization. The funds are apparently purposely organized in countries with a minimum of regulations. This is particularly true as regards tax regulations, and IOS and its subsidiaries have paid taxes at very low rates (almost no taxes are paid in the United States despïte equity investments in this country in excess of $1 billion).

It is the conclusion of the committee staff that the bank secrecy laws of the countries in which IOS operates enable investors in the U.S. securities market to conceal their identity and the purpose of their investments. This in turn makes possible (1) the purchase of stock without meeting the margin limitation on credit promulgated for this purpose by the Federal Reserve, (2) the funneling of funds from illegal enterprises into legal businesses, (3) "insider” trading by those with privileged information, to the possible detriment of other stockholders, (4) possible weaknesses in security when companies controlled by unknown individuals have defense contracts, and (5) evasion of income taxes.


Investors Overseas Services (IOS) was the forerunner of a growing number of off'shore mutual funds which, theoretically, sell their shares to non-Americans, using most of the proceeds to invest in American securities and real estate.

One reason for the tremendous growth of these funds is attributed partially to the fact that most of them operate from countries having corporate and bank secrecy laws. Thus, investors seeking to remain anonymous for any number of reasons, either proper or improper, can do so. Another reason is the Foreign Investors Tax Act enacted by Congress in 1966. This act, in effect, said that if a corporation's sole activity in the United States was the buying and selling of securities, it was not considered doing business in the U.S. and therefore, not subject to U.S. income tax laws. The total amount invested in the American market by these funds is now estimated to be several billion dollars.

IOS is by far the largest of these funds. It was founded as a mutual fund sales business in Paris in 1956 by Bernard Cornfeld. Incorporated as a Panamanian corporation in 1960, it was expanded to include mutual fund management and a vast complex of other financial activities. The Panamanian corporation was reconstituted as a Canadian corporation during the week commencing June 20, 1969, without change in management. The company's principal executive offices are in Geneva, Switzerland, and the registered office is in Montreal, Canada. In addition, the company maintains more than 200 regional sales, administrative, and information offices throughout the world, including Australia, Austria, Bahamas, Canada, England, France, Germany, Hong Kong, Italy, Lebanon, Luxemburg, Malta, Netherlands, Netherland Antilles, Panama, Spain, and Switzerland. IOS divested itself of its United States companies rather than provide full listing of investors, together with their detailed accounts requested by the Securities and Exchange Commission. The litigation leading to the divestitute of these U.S. companies and the revealing agreement are discussed later in the report and in the testimony to be given by the Securities and Exchange Commission before the Committee.


The company has grown into an international sales and financial service organization principally engaged in the sale and management of mutual funds and complementary financial activities, including: (a) investment and commercial banking, providing financial services, among others, in connection with the purchase and carrying of mutual fund shares; (b) sales and management of real estate investments and properties; and (c) life insurance, equity related policies and mutual fund program completion insurance. A diagram showing IOS and its principal subsidiaries appears in Appendix I. Consolidated net income has increased from $1,683,000 1964 to a reported $14,369,000 in 1968.

In terms of its sales volume, the company presently is the largest distributor of mutual funds and related equity investment products in the world, and, in terms of assets under management, the largest manager of mutual funds outside the United States. Total net assets of the mutual funds managed by the company increased from $119,668,000 at December 31, 1964, to $1,821,754,000 at August 31, 1969. As of June 30, 1969, the company reported that about two-thirds of the investments in securities held by company-managed mutual funds were invested in equity securities of United States corporations and approximately one-third was invested outside the United States. As of September 25, 1969, the company owned four percent or more of the securities of some 50 American companies. The company is represented on the board of directors of several of these companies because of the large ownership of equity securities and on others in accordance with loan agreements that were the result of large short and long-term loans.

The company's sales force numbers in excess of 13,000. In addition, the company employs more than 3,000 executive and administrative personnel to support the sales force and to service its more than 750,000 fund, bank, and insurance accounts. These accounts are from investors from more than 100 different countries.

The company exercises central direction of its sales force from its executive offices in Geneva and maintains departments in Geneva and also in FerneyVoltaire, France, covering the various fields of operation. A multi-lingual staff of correspondents is maintained to respond to inquiries from clients and others in ten languages. A translation department insures distribution of most company publications and sales material in at least five languages English, French, German, Italian and Spanish.

The financial data on IOS and its mutual fund management, banking and other financial activity, real estate, and insurance operations in subsequent sections of this report were obtained principally from IOS Prospectus dated September 24, 1969, because the secrecy under which IOS is operated precludes obtaining information from more objective sources. This prospectus was for the sale of IOS, Ltd., stock outside the United States, hence, it did not come under the review of the Securities and Exchange Commission. Capitalization

The capitalization of IOS and its subsidiaries as of June 30, 1969, as adjusted to give effect to a recapitalization in September 1969, was as follows:

June 30, 1969 as adjusted

Minority interests in :

Consolidated subsidiaries --
Unconsolidated subsidiaries.

$772, 000 2, 206, 000


2,978, 000 Shareholders' equity :

Preferred shares, $0.25 par value (75,000,000 shares authorized

(1); 43,303,368 shares issued and outstanding at June 30,

10, 826, 000 Common shares, $0.25 par value (150,000,000 shares authorized

(2); 5,392,000 shares issued and outstanding at June 30,
1969, as adjusted to give effect to the recapitalization; and
10,992,000 shares issued and outstanding) --

1, 348, 000 Consideration received in excess of par value--

8, 951, 000 Amounts due on subscriptions for 2,641,776 preferred shares-- (4,794, 000) Retained earnings--

43, 560, 000 Cost of preferred shares held by an affiliated company

(1, 035,000)

Total shareholders' equity

58, 856, 000

Total capitalization -

61, 834, 000

Revenue sources

One of the company's principal sources of income is the sale and management of mutual funds. The largest mutual funds managed by the company—The Fund of Funds, Limited (“FOT”), IIT-International Investment Trust (IIT), and 108 Venture Fund (International) N.V. ("Venture Fund International")—are sold internationally except in the United States and a few other countries where they are not allowed to be sold. The company has recently developed “national” mutual funds, such as Fonditalia (Italy) and Investors Fonds (West Germany). These funds are designed so that the company can take every advantage available from local laws, especially as related to taxes.

In general, the company has voting or management control of the mutual funds which it sells and manages, thereby giving the company the ability to revise management and other contractual arrangements including the amount of fees rendered between itself and the funds, subject in some instances to approval by governmental authority and in some other instances, approval by fund shareholders.

The company's banking, real estate and insurance subsidiaries conduct some activities which are unrelated to mutual funds, but the services offered to the public by each of these subsidiaries are promoted principally through the company's sales organization. In addition, the company's banking and insurance subsidiaries derive a substantial part of their revenue through activities which directly support, or are directly supported by, the company's mutual fund activities.

The banking group consists of banks in the Bahamas, Switzerland, Germany, Italy, and Luxemburg. This group offers customary European commercial banking services and much of its revenues are generated by lending deposited funds. The banks also conduct investment banking activities which include the underwriting of Eurodollar securities. A finance company subsidiary derives revenues from loans to finance the purchase and carrying of client investments in company-managed mutual funds, as do some of the subsidiary banks. Some members of the banking group derive part of their revenue from the conversion of currencies for the accounts of clients investing in company-managed mutual funds and from soliciting dealer fees in various tender and exchange offers for securities held by such funds. In countries where the law and stock exchange regulations permit, members of the banking group participate in brokerage commissions from transactions by the mutual funds.

Income from real estate activities has been principally earned in connection with sales of condominium apartments, in various stages of construction, located in Spain, Florida, and Mexico.

Revenues from life insurance and related operations consist primarily of premium income from Dover Plan equity linked life insurance policies (where premiums are principally allocated to a portfolio of mutual funds and other securities managed by the company) and premium income on program completion insurance which is marketed by the sales organization as part of ten- or fifteenyear investment programs in shares of mutual funds.

The activities of the company's principal operational groups have interrelationships, which contribute substantially to the net income of the banking, real estate and insurance groups. The following table gives the percentage contribution of each group to the consolidated net income of the company for the five years ending December 31, 1968. This table demonstrates the banking and financial groups' increasing growth and increasing contributions to total earnings.

[In percent)

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Note: The consolidated net income of IOS, Ltd., and subsidiaries increased from $1,683,000 in calendar year 1964 to $14,369,000 in calendar year 1968. For the 6 months ended

June 30, 1969, consolidated net income totaled $9,521,000, an increase of $5,066,000 over consolidated net income of $5,455,000 for the 6 months ended June 30, 1968. Consolidated retained earnings increased from $2,536,000 at Dec. 31, 1964, to $35,280,000 at Dec. 31, 1968. For the 6 months ended June 30, 1969, the retained earnings balance at the end of the period was $43,560,000, an increase of $25,139,000 over the balance of $18,421,000 at the end of the 6-month period ended June 30, 1968.


The taxation laws of the various countries appear to have a large influence on the pattern of growth and activities of the company and its subsidiaries. Because the company is operated when possible in countries with minimum regulations and taxes, the company and its subsidiaries have paid taxes at a very low rate.

The company, as a non-resident Canadian company, pays no income taxes in Canada and it has a very favorable tax agreement with the Swiss Federal and Cantonal governments whereby the taxes paid there are minimal. Certain subsidiaries in the Bahamas pay no taxes. Although IOS had about $1.2 billion of investments in the United States at August 21, 1969, it pays almost no income taxes in this country. The following table demonstrates the small amount of taxes the company pays in relation to its earned income.

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Mutual Fund Management

The company provides management services to its mutual funds in three groups :

(1) Through subsidiaries of Investors Overseas Management Limited ("IOS Management”), an approximately 77%-owned subsidiary of the company.

(2) Through management subsidiaries of the company which IOS Management has a right to acquire in the future.

(3) Through other subsidiaries of the company.

IOS Management owns the respective management companies which manage the following: FOF, IIT, Venture Fund International, Fonditalia, IOS Regent Fund Ltd. (“Regent Fund”), Investors Funds and Investment Properties International, Limited ("IPI”). Management fees charged directly to the funds range from 1/24th of 1% per month of average total net assets (12 of 1% per annum) in the case of Regent Fund to 10% of quarterly net income and realized and unrealized capital gains, subject to a minimum monthly fee of 1/12th of 1% of net assets (1% per annum), in the case of Venture Fund International. The company receives a sales charge of up to 1% when these managed funds purchase shares in other company-controlled funds. The company also receives management fee income from certain proprietary funds for rendering investment advice to particular fund sub-accounts. There is little regulation regarding the payment of these fees.

The mutual funds also pay the charges directly related to their investment portfolios, principally brokerage commissions. Since these funds do not come under the Securities and Exchange Commission regulations, a portion of total brokerage commissions paid is given up to the bank subsidiaries of the company.

Direct portfolio management is centered in the Company's Geneva-based Investment Management Division which at June 30, 1969, managed approximately 60% of the assets of Company-managed mutual funds.

Indirect portfolio management results from services rendered by approximately 30 sub-advisors, located in the United States, the Bahamas, the United Kingdom and Italy, who have been retained to render specific portfolio advice concerning selected portions of the investment portfolios of FOF, The Fund of Funds Sterling Limited (“FOF Sterling”), Fonditalia, Regent Fund, IOS Ven. ture Fund Ltd. (“Venture Fund”), Venture Fund International and the direct investment portion of The Equity Unit Account of The Dover Plan ("The Equity Unit Account”).

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