APPENDIX G-MISCELLANEOUS LANDELS, RIPLEY & DIAMOND, ATTORNEYS, Senator EDMUND S. MUSKIE, Chairman, Subcommittee on Intergovernmental Relations, Washington, D.C. DEAR SENATOR MUSKIE: We represent the California Bankers Association which includes in its membership every bank in the State of California. We are pleased to respond to your invitation to submit comments in connection with your Subcommittee's current hearings on corporate disclosure. We do not intend to comment upon the broader aspects of corporate disclosure that your committee is exploring in connection with its investigation of institutional investors. Instead, we propose to focus on one issue: personal financial privacy and its relationship to the disclosure of bank records The main burden of our remarks is to make the point that any mandated disclosure of "bank" records could embrace the disclosure of private customer records as well. This is true because banks are different than many other corporations in our society in that banks maintain not only their own business record but the private financial records of their customers. These records are comprehensive and include, for example, full details concerning a customer's checking account, including the amounts of checks written, the person to whom the checks are payable, the amounts and dates of deposit and withdrawal, and so on. Similar information is also kept on personal savings accounts, loans, and other financial transactions. In fact, records are maintained on virtually every significant financial transaction between a customer and his bank. Some of these records are necessary to the operation of the bank and for the use of supervisory agencies, but banks keep certain details of customer records only because of the requirements of a new law. This new law, the Bank Secrecy Act, requires banks and other financial institutions to keep elaborate and detailed records on their customers including, for example, maintenance of photostatic copies of the front and back of all checks drawn upon a checking account. This information must be retained for up to five years. The Act also requires banks to submit automatic reports to the federal government whenever one of its customers engages in specified monetary transactions. The Act requires that all this be done without any provision for notification of the bank customer. In fact, we suspect that the vast majority of bank customers have no idea that their banks are maintaining vast records and reporting on their personal financial transactions-all for the use of the federal government. California banks do not favor a law that requires them to breach the confidential relationship that they have with their customers. As your committee is no doubt aware, the California Bankers Association, along with various other plaintiffs including the American Civil Liberties Union, has challenged the constitutionality of the Bank Secrecy Act. Although a divided U.S. Supreme Court upheld the constitutionality of the Bank Secrecy Act. Although a divided U.S. Supreme Court upheld the constitutionality of that Act in a recent decision,' legislation that would overturn the Act has been introduced in both the Senate and the House. Similar legislation has been introduced in the California State legislature where it has passed the Assembly and is now in the Senate. While the California Bankers Association is heartened by the broad bi-partisan support which the Financial Privacy legislation has received to date, we nevertheless continue to be troubled by the legal position which the government has adopted and consistently maintained throughout the Bank Secrecy Act controvery. The government has apparently adopted the legal theory that once a bank customer transacts personal financial business with his bank, the customer loses his legal right to protect the disclosure of the information contained in records that the bank now has in its possession. In the government's view, what were the 1 The California Bankers Association v. Shultz, 945 s. Ct. 1494 (1974). See the Right to Financial Privacy Act of 1974, H.R. 10906 and S. 2200. The Senate Subcommittee on Financial Institutions has scheduled hearings on S. 2200 for the end of California Right to Financial Privacy Act, A.B. 1609. July. private records of the customer are now records of the bank. According to this theory, once a customer makes any financial information available to a bank, he has then given up his "expectation of privacy" in those records. Consequently, the customer cannot legally object if the government seeks disclosure of his records from the bank. Customer records have become "bank" records. We submit that a bank customer has no idea that by opening a checking account and drawing checks, he has in any way given up his expectation of privacy in his personal bank records. Of course the right to privacy is not absolute. The U.S. Constitution provides standards by which the government may conduct searches and seizures and the judicial processes of the courts provide means to subpoena private papers. But these are limited and carefully supervised access routes to the private domain. The danger is that these safeguards may be completely bypassed by a government eager to gain its information firsthand and without the necessity of involving the judicial branch. The danger that this poses could apply to other areas. If bank customers have no say in records their banks are required by federal law to keep on them, do telephone subscribers have any more right to protect the privacy of their taped conversations in the possession of the telephone company? Or would patients have any more right to protect the disclosure of their medical records if a law required their Medicare-paid physician to disclose this information to a government agency? These are serious questions which must be faced by the Congress and the nation in the months and years ahead, but we do not think that the examples we have suggested are beyond the ultimate reach of the legal path which the government has seemingly chosen to follow. The difficulties that this poses for banks are clear. A bank is caught in the difficult middle position of being forced to disclose what in legal theory the government maintains are "bank" records but which in operating reality are private and personal records which bank customers have entrusted to their bank's care. We quickly add that we do not mean to imply that your Subcommittee has shown any interest in requiring the disclosure of this type of confidential information. However, we do wish to make this special problem known to you so that your Subcommittee will be sensitive to a unique and major problem which disclosure poses for the banking industry and, most importantly, for bank customers-and that includes just about all of us. These comments have only lightly touched upon a most serious constitutional and legal issue with which we have been deeply involved for over two years. We would welcome any further inquiry by your Subcommittee on this topic and hope that you will call on us for amplification of any point that may interest you. In the meantime, the California Bankers Association very much appreciates this opportunity to submit comments and we hope that you will find them helpful. Sincerely yours, LANDELS, RIPLEY & DIAMOND. JULY 9, 1974. Hon. RAY GARRETT, Jr., Chairman, Securities and Exchange Commission, DEAR MR. CHAIRMAN: When you testified at the Government Operations subcommittees' hearings on corporate disclosure, there was discussion of the Securities and Exchange Commission's computer capability and especially of information dealing with affiliations of directors and officers of companies subject to SEC regulation. The enclosed letter from Ronald L. Kuehn, Jr., general counsel of Southern Natural Gas Company, indicates a deficiency in the computerized material within the SEC files. Mr. Kuehn points out that John S. Shaw, Jr. is reported as having interlocks which appear to present potential conflicts of interest. As Mr. Kuehn explains in his letter, two of the named companies with which he is associated are under the control of the third named company and this appears to be a proper and necessary arrangement for him. We bring this to your attention with the hope that the SEC computerized system can be changed so that "interlocks" such as these can be differentiated from interlocks involving competing or potentially competitive companies. Very truly yours, LEE METCALF, Chairman, Subcommittee on Budgeting, Management and Expenditures. Enclosure. SOUTHERN NATURAL GAS Co., Re Continuing Joint Hearings concerning the Collection and Tabulation of Corporate Information by Federal Agencies by the Sub-Committee on Budgeting, Management and Expenditures and the Sub-Committee on Intergovernmental Relations of the Senate Government Operations Com mittee Hon. LEE METCALF, U.S. Senate, Washington, D.C. DEAR SENATOR METCALF: I have read with interest that portion of the record in the above-captioned hearings which appeared in the May 21, 1974 Congressional Record at pages H4228 and H4229 dealing with the issue of interlocking oil company directors. I refer specifically to the testimony of Mr. Aspin and Exhibit 1 which is described as the product of a Securities and Exchange Commission computer search of oil and gas executives. As you will note from the record, Mr. John S. Shaw, Jr. is listed on the above-referenced Exhibit 1. The purpose of this letter is not to debate the question or the impact of interlocking oil company directors, but to reflect in the record of the joint hearings the circumstances under which Mr. Shaw, Chairman of the Board and Chief Executive Officer of Southern Natural Resources, Inc., is represented on the Board of Directors of Southern Natural Resources, Inc., a holding company, Southern Natural Gas Company, a natural gas transmission company, and The Offshore Company, a contract drilling company which is primarily engaged in oil and gas exploration and development drilling for major oil companies. Neither Southern Natural Gas Company nor The Offshore Company can or should be characterized as "oil companies" as that description is commonly understood. Southern Natural Resources, Inc. is a holding company which owns 100% of the common stock of Southern Natural Gas Company, and approximately 88% of the common shares of The Offshore Company. Therefore, Southern Natural Gas Company and The Offshore Company are under the common control of Southern Natural Resources, Inc. As I noted earlier, Mr. Shaw is Chairman of the Board and Chief Executive Officer of Southern Natural Resources, Inc., Southern Natural Gas Company, and The Offshore Company; in addition, Mr. Shaw also serves as President of Southern Natural Resources, Inc. and Southern Natural Gas Company. Clearly, Mr. Shaw's membership on the Board of Directors of all three companies is not only proper, but absolutely necessary if he is to fulfill his obligations as Chief Executive Officer of those companies. I respectfully request that this letter be made a part of the record in the abovecaptioned hearings so that Mr. Shaw's relationship with Southern Natural Resources, Inc. and The Offshore Company is clarified. Very truly yours, Hon. LEE METCALF, Washington, D.C. DEAR SENATOR METCALF: Thank you for your letter of July 9, 1974. I regret the delay in providing a reply. You suggest that the SEC's computerized system be changed so that "interlocks" involving competing or potentially competing companies can be differentiated. In addition, you mention a communication from Mr. Ronald L. Kuehn, Jr., representing Southern Natural Gas Company, with regard to your statement relating to that company. I believe your reference to an appearance at the Government Operations Subcommittee Hearings on corporate disclosure relates to the appearance by Commissioner Sommer, rather than myself, as reflected in Hearings Before the Subcommittee on Budgeting, Management, and Expenditures and the Subcommittee on Intergovernmental Relations of the Committee on Government Operations, United States Senate, Ninety-Third Congress, Second Session on Corporate Disclosure, April 23, 24, and May 20, 21, 1974, Part 2. See pages 943-976 thereof. The Commission does not include in its computerized data bank information as to whether companies referred to therein are competitive or potentially competitive. The statutes we administer do not require or authorize such determination except possibly in minor areas such as reorganization proceedings or applications pursuant to the Investment Company Act of 1940 or the Public Utility Holding Company Act of 1935. While a company reporting to the Commission is required to disclose the general competitive conditions in its industry, it would appear that the determination you mention would require development of much more detailed and sophisticated information. The Commission produces a "Directory of Companies Filing Annual Reports With the Securities and Exchange Commission". Such compilation indicates industry groupings of companies based upon the Enterprise Standard Industrial Classification developed by the Office of Management and Budget, Executive Office of the President. Such industry grouping does not appear equivalent to the determinations mentioned in your letter. Our record system in this area is described under "Corporation Index" at page 972 of the above-mentioned "Hearings". I now turn to Mr. Kuehn's letter of June 27, 1974 regarding the position of Mr. John S. Shaw, Jr., Chairman of the Board and Chief Executive Officer of Southern Natural Resources, Inc., who is a member of the board of that company and the board of its subsidiaries, Southern Natural Gas Company and The Offshore Company. Mr. Kuehn points out that Mr. Shaw's membership on such boards of directors is not only proper but necessary if he is to fulfill his obligations as chief executive officer of those companies. Mr. Kuehn points out that none of the companies can be characterized as "oil companies". The SEC directory, referred to above, reflects Southern Natural Resources, Inc. and Southern Natural Gas Company under Industry 492, Gas Companies and Systems. The Offshore Company does not appear in our directory. It is our understanding that such company is not required to file separate reports with the Commission. It is my understanding that no representation has been made by the Commission or its staff that Mr. Shaw has interlocks which appear to present potential conflicts of interest. I believe I can furnish some background information with respect to the statements attributed to you in the Congressional Record for May 21, 1974 mentioned by Mr. Kuehn. It is my understanding that our staff prepared, in response to a request from Congressman Gunter, a name and relationship computer print-out with respect to the names of certain companies and natural persons furnished by Congressman Gunter. Under date of December 26, 1973, we furnished a copy of the print-out to Congressman Aspin in response to a request from his office. I believe the caption "Exhibit 1, Interlocking Oil Company Directors, Source: SEC Computer Search of Oil and Gas Executives", which appears in the Congressional Record, was not supplied by us. The print-out was derived from the SEC computer system described under "Name and Relationship Search" at page 974 of the "Hearings" mentioned above. Please write to me again if you have further questions in regard to this matter. Sincerely, RAY GARRETT, Jr., Chairman. THE EQUITABLE TRUST CO., Hon. LEE METCALF, Chairman, Subcommittee on Budgeting, Management, and Expenditures, Committee on Government Operations, U.S. Senate Building, Washington, D.C. DEAR SENATOR METCALF: We have your letter of June 6, 1974, by which you provided us with a transcript of the recent hearings on corporate disclosure before your subcommittee. As noted in the record, on October 11, 1973, you requested certain information regarding corporate stock holdings and related matters from 25 institutional investors with assets of $5 billion or more under management. The Equitable Trust Company was included on this institutional list. This inclusion of Equitable Trust appears to have been in error in that the assets under management at this Bank do not approach the $5 billion parameter. To illustrate this more clearly, assets under management at Equitable, as reported to the F.D.I.C., were $754 million in 1971, $768 million in 1972, and $682 million in 1973. In the 1971 "Director of Trust Institutions" published by "Trust & Estates" magazine, Equitable was incorrectly cited as managing $5 billion in trust assets. 37-733 74 pt. 3 50 We feel that this misprint may account for the erroneous addition of Equitable to your list of large institutional investors. You may wish to incorporate this information into a future hearing record. DEAR MR. DALY: I appreciate your 24 June letter in which you advise that the "Directory of Trust Institutions" incorrectly listed Equitable Trust as a bank managing more than $5 billion in trust assets. That erroneous reference was apparently the basis of the incorrect information which appeared in our subcommittees' publication regarding corporate disclosure, I have directed that your letter be made part of our hearing record. I hope that our use of this incorrect material has not caused you and your institution any embarrassment or inconvenience. Enclosed for your information is Part Two of our hearings. LEE METCALF. Hon. LEE METCALF, FEDERAL COMMUNICATIONS COMMISSION, Chairman, Subcommittee on Budgeting, Management and Expenditures, Committee on Government Operations, U.S. Senate, Washington, D.Ĉ. (Attention Mr. Reinemer.) DEAR SENATOR METCALF: As discussed in a telephone conversation between Mr. Vic Reinemer, Staff Director of the Subcommittee on Budgeting, Management and Expenditures, I herewith supply the following excerpts from the Commission's ownership records and certain explanatory information relative to the enclosed material. The information submitted by the Columbia Broadcasting System, Inc. that is contained in the Commission's computer "print-out" of July 5, 1972, contains data that was, in part, based on the ownership of stock as of January 31, 1972. A photocopy of the Commission's "print-out" for Station WCBS, which is the key station for CBS for July 5, 1972, is enclosed (Item I). Also enclosed is a photocopy of a portion of the CBS ownership report that was filed on February 29, 1972, which contains a statement concerning the Chase Manhattan holdings in CBS, Inc. (Item II). Also enclosed is a letter of March 18, 1974, from CBS (Item III) concerning the discrepancy in the Chase Manhattan holdings as of January 31, 1972, and its holdings as reflected in Senate Document No. 93-62 printed March 4, 1974, entitled Disclosure of Corporate Ownership. The discrepancy between the computer "print-out" data apparently arose from several sources. The CBS reports were apparently misinterpreted by the Commission staff at the time that they were analyzed for compilation in the computer bank. Also certain ownership data should have been deleted from the computer's data bank at the time certain new ownership data was entered into the computer system which resulted in a duplication of holdings in the "printout". You have also requested the current ownership data as shown by the CBS reports. As shown by the photocopy of the excerpt of the CBS Ownership Report (Item IV) that was received September 23, 1974, which reports information as of August 31, 1974, the Chase Manhattan Bank is shown as the holder of record of 1,446,981 shares (4.93%) and a statement as to the number of shares and percentage of stock (common and preferred) held with voting power is stated to be "Less than 1%". Should you have any further question, please do not hesitate to let me know. Enclosures. |