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Of course, we have long since made this departure where the beneficiary is a reporting person under Section 16 of the Securities Exchange Act or it is otherwise a control person, or affiliate, of the portfolio company, or one who has acquired five percent and becomes subject to Section 13(a). But the proposed Section 14(g) is a far-reaching departure.


One approach to the problems raised might be to require such disclosure only when the shares constitute more than a specified percentage of the outstanding shares, but making the percentage much lower than 10 percent or even 5 percent. and two percent have been suggested with appropriate rulemaking power vested in the Commission. The theory, then, would be that an investor can preserve privacy through a personal trust and yet retain voting power so long as he keeps his positions in publicly-owned companies insignificant in terms of voting strength. Above that, public policy favoring disclosure will prevail over that favoring the privacy of personal investments. Another consideration is one of competitive fairness among broker-dealers and trust companies and U.S. and foreign banks. The foreign part of the problem is not just one of even application of the law as written, but also as enforced. We have been engaged in long, and so far futile, efforts to compel disclosure of bank customers in some countries, even for purposes of criminal investigation. Here, S. 425 offers a


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device that might do the job, namely the judicial disenfranchise

ment or divestiture of the stock. S. 425, as presently drafted,

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would employ this device only for violations of the screening


We suggest that it be expanded to cover violations

of the disclosure provisions, both foreign and domestic. Consideration should also be given to the impounding of dividends

for non-compliance.

It is true companies have complained that they are sometimes unable to determine who actually owns their securities and thus cannot communicate effectively. We do not believe that the solution to this problem need be as all-encompassing as that proposed in S. 425. Pursuant to our new legislative mandates, our staff is considering ways to encourage or require that brokers who hold securities for their customers make sure that their customers receive issuer communications. We believe that this, in conjunction with a rule requiring issuers to provide sufficient quantities of material to brokers and others for their customers, will enable companies to communicate effectively with their shareholders.

S. 425 also would add a new Section 13(f) to the Securities Exchange Act, to require any foreign person, company or government to file with the Commission a confidential statement, containing certain specified information, thirty days in advance of any acquisition by which that foreign


investor would own more than five percent of any class of

equity securities of any United States company with more than one million dollars in assets.

The Commission would be required to transmit the preacquisition statement to the President, who would be authorized to prohibit the acquisition if he finds it necessary to do so in order to protect the national security, foreign policy of the domestic economy of the United States. An amendment to S. 425 has been proposed by Senators Williams and Javits which would require the President to prohibit such an acquisition in certain instances, principally dealing with discriminatory


In my testimony last March, I voiced our concern that this proposed section might engender conflicts of interest within the Commission, with respect to our duties to require full disclosure, if we should receive nonpublic information pursuant to these provisions. For example, under this bill, the Commission could receive secret, but material, information regarding a proposed acquisition of equity securities of

an issuer by a foreign investor while the Commission's staff is reviewing the adequacy of disclosures in a filing relating to a public offering of that issuer's securities or relating to corporate actions to be adopted by a vote of that issuer's security holders.


Accordingly, the Commission requests that, if the

screening provisions of the bill are enacted, and the Commission

is designated as the repository for the pre-acquisition filings, the Commission be authorized to require the publication of those reports if we find it necessary in the interests of investors.

Beyond, with respect to the substance of Section 13(f), as it would be amended by S. 425, and the other bills that you are considering here today with provisions for screening or otherwise controlling foreign investment in American companies we do not think it appropriate for the Commission to state a position.

Other than our interest in preserving the integrity and success of our capital markets, the Commission is not in any position to, and does not have any special expertise for, comment on the desirability of the screening process that would be

established by S. 425, or on the powers relating to foreign investors that would be granted to the Secretary of Commerce pursuant to the other bills mentioned.

The Subcommittee no doubt recognizes, however, that any deterrent to foreign investments in the United States could have an adverse impact on the future ability of public companios to raise capital in the United States, and could


impair the future depth and liquidity of trading markets in the securities of United States companies. Similarly, legislation of this nature could lead to the enactment of still more protectionist legislation by other countries which may impair the ability of United States companies to raise or invest capital abroad.

The Commission supported the enactment of the Foreign Investment Study Act of 1974. Presently, the Departments of Treasury and Commerce are conducting an extensive study of foreign investments in the United States pursuant to that Act. An interim report from those Departments to the Congress is due on or about November 1, 1975, and a final report is due sometime around May 1, 1976.

In addition, by Executive Order of May 7, 1975, the President has established a Committee on Foreign Investment and directed the Commerce Department to obtain and analyze information on foreign investment in the United States. The Commission's staff is working closely with Commerce to increase the availability of information on foreign investment, and we expect the amendments to our rules which I discussed earlier to facilitate this effort.

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