There is no compelling need for disclosure which would outweigh the constitutional infirmities of Section 4. As previously discussed, the disclosure requirements of Section 4 bear no relationship to the basic purpose of the Bill the "effective monitoring of all foreign investments in American business." - It has been suggested that Section 4 has a purpose which is unrelated to foreign investment alleviating the "difficulties which government agencies, corporate management, and investors have all encountered in identifying not only foreign investors in American business but all beneficial owners. However, none of these three groups has a need for information of the sweeping scope afforded by Section 4 which is more compelling than the individual's constitutionally protected right of privacy. The SEC, the government agency assigned the primary responsibility for regulating securities disclosure, has disclaimed any need for the information produced by Section 4. SEC Chairman Garrett has pointed out that the Commission's need is limited to "significant information" regarding beneficial ownership and that the Section 4 disclosure requirements "are too all-encompassing for any reasonable use. Further, as former Senator Ervin has appropriately stated: "(J)ust because government agencies want information about individuals should not be sufficient reason for forcing people to provide it or face criminal penalties." Ervin, Justice, the Constitution, and Privacy, 39 Vital Speeches 677, 679 (1973). Congress has previously determined that the need of corporate management and investors to be informed of the identity of shareholders exists only where there is a potential of significant impact on corporate policies and management. In limiting requisite disclosure of individuals' holdings, Congress has applied a 5% benchmark. While corporate management may have an interest in being informed of the identity of its shareholders, it would be unseemly and inappropriate for the Federal government to promote this purely private interest at the expense of the public interest in the right of privacy. Further, a corporation's relations with its shareholders has traditionally been a concern of the individual states, and the Federal government has intervened only when state laws have proved ineffective in protecting the shareholders. Here there is no need for Federal legislation to protect shareholders, since if a shareholder prefers that corporate management be aware of his identity, he can register stocks in his own name or even request the issuer to communicate directly with him. In sum, Section 4 would violate shareholders' constitutionally protected right of privacy without advancing any legitimate concern of the Federal government. As SEC Chairman Garrett has recognized, Section 4 constitutes a "fundamental departure from our settled norms" regarding the privacy of individual investors. 3. Administrative Burdens Section 4 will not only prove costly when measured in terms of loss of individual privacy but will create other costs which, while perhaps more mundane, will nonetheless be very substantial. A. Burden on the Individual The Section 4 reporting requirements are imposed on natural persons as well as institutional holders. Among the individuals who would be required to make these reports are a parent who purchases stock for his children under a Gifts to Minors Act, a husband who establishes a modest irrevocable trust for his wife, an individual who serves as conservator or guardian for an incompetent relative and a son who serves as executor for a parent's estate. These individuals, many of whom lack financial and legal sophistication, would be required to make reports involving a concept of considerable complexity "beneficial ownership". Failure to sub - mit proper reports would subject the individual to potential civil and even criminal liability. Accordingly, the individual's costs of making these reports will extend far beyond postage and a few minutes to complete a simple form, and include substantial out-of-pocket expenses for advice in completing forms which must inevitably be governed by complicated rules. Section 4 fails to define the phrase "beneficial owner". One example should serve to illustrate the considerable difficulty in providing a statutory or regulatory definition and, concommitantly, the difficulties which individuals will have in complying with the requirements of this Section. - Assume that a widow acts as a co-trustee of a residuary trust established under her husband's will. The terms of the trust provide for payment to the widow of 50% of the net income, with the remaining income to be distributed among the widow and the husband's descendants in such amounts and proportions as the independent trustee may determine. In addition, the independent trustee may invade principal for the benefit of any person to whom income might be distributed. Upon the death of the last surviving of the widow and her children, the principal of the trust would be paid over in equal shares to the then living grandchildren, or, if none, to a designated charity. Do the trustees hold the shares in the trust for the widow's account or someone else's account, and, if the latter, who is (are) the beneficial owner(s)? If there are, for example, six beneficial owners and the trust has 100 shares of General Motors, would each beneficial owner own 16 2/3 shares? The only certain conclusion is that the process of obtaining the answers to these questions will impose a considerable burden on the widow and her co-trustee. B. Burden on Institutions SEC Chairman Garrett has expressed his concern "about the substantial costs that would be imposed on brokerage firms, banks, trust companies, and, especially, transfer agents . . . since the Bill would apply to all beneficial owners, even the owner of one share. " Similarly, Mr. John Leslie, testifying on behalf of the New York Stock Exchange, has explained that "complete disclosure of the names of every beneficial owner would create monumental problems for the brokerage industry." While institutions may have greater sophistication and easier access to necessary information and legal advice than the individual, the institutions will be confronted with a greater variety and more complex level of problems. These problems can be resolved only at substantial expense. * Assume, for example, that a bank or brokerage house holds in a custodial account the investment portfolio of a subsidiary of a company owned by 25 individual shareholders. The institution must determine who is the "beneficial owner" of the stock in the portfolio the subsidiary, the parent or the individual shareholders of the parent. An even more difficult problem may arise when the bank's customer is not the beneficial owner, and the customer claims that disclosure of information regarding the beneficial owner would violate the privacy laws of another country. - It is to be emphasized that the costs which would be incurred by institutions in complying with Section 4 cannot only be measured by money spent. These costs include the loss of employee time which would otherwise be utilized to directly benefit the institutions' customers. *It has been suggested that the impact of Section 4 on institutions would be reduced because they already have the names of the beneficial owners. However, the underlying premise is accurate only when an institution's customer is the beneficial owner and the question of "beneficial ownership" can be easily resolved. C. Burden on the Securities and Exchange Commission SEC Chairman Garrett has acknowledged that the burden of receiving the vast amount of data would "be severe on the Commission" and that the data would be too expensive to store. Not only would substantial resources be required for the actual physical process of handling and storing the material, but there would be a perhaps less obvious drain on resources resulting from the necessity of developing rules and regulations implementing the disclosure requirements. The costs of these burdens will in large part be borne by the investing public, both as a result of the additional costs to taxpayers and the diversion of the resources of the Securities and Exchange Commission to this project. D. Burden on Issuers As the party ultimately responsible for the collection of the requisite information, a fourth level of cost will be imposed on the issuing companies. An issuer must bear the considerable monetary expense and loss of productive employee time involved in collecting and storing the reports of record holders and preparing its own reports for the SEC. Further, issuers will face precisely the same problem as the institutions if a holder of record claims legal privilege and refuses to disclose the beneficial owner. Although it is impossible to predict the precise effect of Section 4 on the process of selection among investment alternatives, there will be a withdrawal from the equity market proportionate to the extent that investors deem privacy to be a paramount consideration. Since disclosure requirements would not apply to investments in debt securities or foreign equity securities, these investment vehicles will become relatively more attractive than American equity securities. The flight of the individual investor from the equity markets can only be accelerated by a statute which imposes an additional burden on those who make direct equity investments. The difficulty of American corporations, both large and small, in obtaining equity capital is so well documented as to require little elaboration. Only the perhaps obvious point should be made that any factor which increases the relative attractiveness of other forms of investment media will result in a further decline of equity capital available to United States companies. In this connection, it is to be noted that the need for privacy regarding equity investments may be particularly important for beneficial holders residing in foreign countries which have less stable governments and less developed legal systems. A member of a political, national or religious minority in such a country may have compelling reasons for fearing the disclosure of his holdings. The imposition of disclosure requirements will seriously handicap United States financial institutions in competing with their foreign counterparts. Although by its terms Section 4 applies to foreign as well as domestic holders of record, in practice the application of the disclosure requirements is unlikely to be consistent. As SEC Chairman Garrett has pointed out, the "foreign part of the problem is not just one of even application of the law as written, but also as enforced. " The SEC has frequently been unsuccessful in its efforts to compel disclosure of customers of foreign banks, even for purposes of criminal investigation. A refusal by a foreign institution to disclose beneficial owners may well be grounded on its country's privacy laws. Consequently, it is likely that a significant disparity will develop with respect to the enforcement of Section 4 against, respectively, United States and foreign financial institutions. Those investors for whom privacy is an important consideration will naturally tend to utilize the institution which can best satisfy this need. In selecting between a United States institution and a foreign institution, an investor would consider not only technical expertise and reliability, but also the advantage of privacy which the foreign institution alone would be able to provide. Conclusion Based on the foregoing reasons, The New York Clearing House Association urges that Section 4 be deleted from the Bill. |