Mr. MULTER. I am voicing my own opinion. I would be completely opposed to that. That is an American bank, operating entirely with taxpayers' funds. Secretary WAUGH. That is correct. Mr. BROWN. This might take over the Export-Import Bank. Mr. MULTER. It should not. I think Secretary Humphrey agrees that this agency would not make loans that the Export-Import Bank would make. The gentleman said he had no objection to writing into this a provision that this IFC would not make a loan that should be made by the Export-Import Bank. The CHAIRMAN. This is not a matter of discretion. The ExportImport Bank can't make these loans under its charter; can it? Secretary WAUGH. That is correct. I am not sure. Reserve that question, please, for General Edgerton, who follows me. The CHAIRMAN. Are there any further questions? Mr. MULTER. No, sir. Mr. O'HARA. Mr. Chairman. The CHAIRMAN. Mr. O'Hara. Mr. O'HARA. The amount of money that is being appropriated, if this legislation is passed-the amount contributed by our Government is only a token payment; isn't it? You expect at a later period much more money will be put in? Secretary WAUGH. Again, I don't want to be flippant, Mr. O'Hara, but I have been operating so long that $35 million never seems to me like a token contribution. I think it is a substantial contribution. I think it is substantial, but answering your question, yes. I think that the hope is that if this is successful, they will be able to go out on the open market, sell debentures and raise more money in that manner. Mr. O'HARA. I remember some years ago, in the case of the International Bank, this committee had reported it out unanimously, and I think it was passed by the House by consent, a measure permitting national banks to invest in the securities of the International Bank. Secretary WAUGH. That is correct. Mr. O'HARA. At the time, I had some concern about it because it seemed to me that the market for the sale of the securities would be largely in the United States and it would be all left up to the American people, making a very much larger contribution in proportion to the contribution of the governments and peoples of foreign countries. Looking ahead, is it not possible that while other participating nations will make their fixed contributions, the contribution of our Government will be augmented by sales of securities among the people of the United States bringing our actual contribution greatly out of focus? Secretary WAUGH. I think one of the most significant developments in the financial field, insofar as the International Bank is concerned, has been the sale of its securities in foreign markets. The facts of the matter are, the percentage of International Bank bonds that are sold in the domestic market grows smaller each year, and the International Bank floated this current year an issue of bonds in Switzerland, and Switzerland is not a member of the International Bank. In other words, through the medium of the International Bank, we have raised the bank has raised money in foreign markets, Swit zerland, to be specific, and turned around and loaned it in its member countries. There is a larger and larger percentage of the International Bank's bonds sold each year in the foreign markets. I remember when the International Bank bonds came out and they not only had to be made legal for national banks, they had to be made legal for trust funds under the investment requirements of the various State laws. There was a great deal of hesitation that you mentioned, but it has been a most successful investment for the trust funds and for the private investors throughout the United States. Mr. O'HARA. That is very interesting, and I thank you, Mr. Secretary, for the information. I may be a little overconcerned, because my memory goes back to just about this time in the year 1929, and at that time we were selling to the American people many foreign securities, and they were sold and purchased on the advice of the wisest bankers in the country. They all went sour. I am wondering if, as Mr. Brown suggested, we are proceeding too hastily in this field. Secretary WAUGH. I can go back to 1917, when we sold the first French bonds in this country during World War I. I think we have gone a long ways since 1916, and the fall of 1929, which I remember very vividly. I think the restrictions that we have now, the sophistication of the buyers that we have now, will in great measure be a self-regulating restriction in the sale of the bonds. Mr. PATMAN. Would you yield? Mr. O'HARA. Yes. Mr. PATMAN. Do you refer to SEC restrictions? Secretary WAUGH. The SEC is one of the things I was thinking of. Mr. PATMAN. They are exempt from this, aren't they? I was talk Secretary WAUGH. I was referring to the whole class of bonds that were being sold at that time which could not be sold now. ing about the whole broad market. I certainly hope we never get into another 1929 fiasco, and I do think that the buyers of this day and age have sufficient sophistication that they are not going to buy these bonds unless the bank is well managed, and operating successfully. On the question of the SEC I would like to submit some material for the record. (The information is as follows:) SECURITIES AND EXCHANGE COMMISSION, Re International Finance Corporation. Assistant General Counsel, Treasury Department, Washington 25, D. C. DEAR MR. ARNOLD: Commissioner Goodwin is out of town and has asked me to write you concerning the International Finance Corporation. In his letter to you dated February 18, 1955, Commissioner Goodwin enclosed a staff memorandum indicating the areas in which problems might arise under the securities acts with respect to the International Finance Corporation. The letter pointed out that by reason of insufficient information no conclusive answers could be given at that time. Since that date conferences have been held with officials of the International Bank at which additional information was furnished concerning the proposed operations of the Corporation. Enclosed are copies of staff memoranda which discuss the problems and recommend that no question need now be raised under the securities acts concerning the proposed organization and presently contemplated activities of the Corporation. The Commission has concurred in the views set forth in the memoranda. Should you desire further information or assistance from this Commission on the matter referred to in the memoranda we will be pleased to have you communicate with us. Sincerely yours, BYRON D. WOODSIDE, Director. MEMORANDUM MAY 16, 1955. To: The Commission. From: Byron D. Woodside, Director, Division of Corporation Finance; Robert Recommendation: That the Treasury Department be advised that no question need now be raised under the statutes administered by the Commission concerning the proposed organization and presently contemplated activities of the International Finance Corporation. The executive directors of the International Bank for Reconstruction and Development ("bank") have recently submitted to the members of the bank articles of agreement for the proposed International Finance Corporation (IFC). The proposed articles were submitted to the Commission by the Department of the Treasury for consideration in light of the acts administered by the Commission. A memorandum was prepared by the staff and previously submitted to the Commission, outlining the purposes of the IFC and the impact of the various acts administered by the Commission to the proposed organization and activities of IFC. In essence the purpose of IFC as stated in the articles is to further economic development by encouraging the growth of productive private enterprise in member countries, particularly in the less-developed areas, thus supplementing the activities of the bank. In carrying out this purpose the articles state IFC shall: (1) In association with private investors, assist in financing the establishment, improvement, and expansion of productive private enterprise which would contribute to the development of its member countries by making investments, without guaranty of repayment by the member government concerned, in cases where sufficient private capital is not available on reasonable terms; (2) Seek to bring together investment opportunities, domestic and foreign capital, and experienced management; and (3) Seek to stimulate, and to help create conditions conducive to, the flow of private capital, domestic and foreign, into productive investment in member countries. In a message to Congress dated May 2, 1955, the President stated: "I urge the Congress to enact promptly the legislation permitting the United States to join with the other free nations in organizing theh IFC-an important part of our foreign economic program which will further more rapid advance by free people everywhere as they strive to improve their material well-being." The articles permit IFC "to sell its investments to private investors whenever it can do so on satisfactory terms"; "to invest in marketable securities as it may determine * * * in order to earn a return on funds not needed in its financing operations and to borrow funds and in that connection to furnish such collateral or other security therefor as it shall determine." These powers raised questions under the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, and the Investment Company Act of 1940. Since the articles did not contain sufficient facts to resolve these problems, two conferences were held with officials of the bank at their request. Representatives of the bank were Davidson Sommers, General Counsel, and Messrs. Broches, Nurick, and Bateson, of the legal staff. At these conferences it was stated that IFC would be financed by the member countries of the bank in the same proportion as their interests in the bank, though all members may not participate. It is not anticipated that any debt securities or any guaranties of securities will be publicly offered by IFC in the United States for the foreseeable future. Insofar as portfolio securities are concerned, Mr. Sommers stated that the IFC might often find it appropriate to offer them first to the equity securities holders of the borrowers. It was not presently anticipated that any public distribution would be made thereof in the United States. Mr. Sommers further stated that he understood that, while a Securities Act question might arise in connection with the public sale of the portfolio securities of IFC and more clearly with respect to other securities by the Corporation, it has been determined by the bank not to seek relief on behalf of the Corporation by way of exemption under the Securities Act. Under the circumstances, the staff is of the view that activities of IFC, as stated in the articles and as outlined by Mr. Sommers, raised no immediate problems under the Securities Act of 1933. With respect to the Trust Indenture Act, it is the view of the staff that the securities of IFC would be exempted from that act under the provisions of section 304 (a) (6) and section 3 (a) (2) of the Securities Act of 1933 (incorporated in sec. 304 (a) (4) of the 1939 act). In this connection, the status of IFC would be similar to that of the bank and the staff believes both should be treated alike. The bank's exemption under said act was recognized in Commission's release No. 1 under the Bretton Woods Agreements Act. As to portfolio securities, this act would apply in the same manner as the Securities Act above discussed. Insofar as the Securities Exchange Act of 1934 is concerned, there appears to be no present problem thereunder, since the staff is informed that there will be no attempt at this time to issue and list any of the securities of IFC nor will any attempt be made to list the portfolio securities. Here, too, Mr. Sommers advised that IFC would not seek special relief from the 1934 act. Insofar as the Investment Company Act is concerned, it is our view that IFC, like the bank, does not come within the purview of the said act. The purposes and operations of IFC clearly distinguish it from the type of investment vehicle intended to be regulated under the act and in this respect is similar to the bank, to which Congress granted special status under Federal law in 1945. Apart from the foregoing, the exception from the definition of investment company provided by section 3 (c) (3) to banks may be applicable to IFC, since, broadly speaking, it would come within the purview of the definition of the term "bank" in section 2 (a) (5) (A). In addition, under section 3 (b) (1), IFC may be considered excepted from the definition of "investment company" as a company engaged in a business other that that of an investment company, namely, that of a lending agency with special governmental purpose. Attached is a memorandum which discusses these points in more detail. In the light of the foregoing, it is recommended that a letter be forwarded to Treasury stating briefly the conclusions of the Commission and enclosing a copy of this memorandum. To: The Commission. MEMORANDUM MAY 10, 1955. From: Division of Corporate Regulation. Subject: Applicability of the Investment Company Act of 1940 to the International Finance Corporation. CONCLUSION The Investment Company Act does not apply. We have considered the status of the International Finance Corporation in relation to the Investment Company Act and we believe the IFC, like the International Bank, does not come within the provisions of the Investment Company Act. In general, this conclusion is based upon the purpose and operations of IFC, its special juridical status under Federal law, and the purpose and provisions of the Investment Company Act. (1) The Investment Company Act was designed for the supervision and regulation of investment companies and investment trusts primarily engaged in the business of investing, reinvesting, trading, owning, or holding investment securities. This regulation is not merely in terms of disclosure for the statute contains specific provisions regulating many of the internal affairs of investment companies, their transactions with affiliated persons, methods of accounting and custody of assets. Furthermore, the Commission is given extensive powers under the Investment Company Act with respect to the activities of investment companies. For example, section 42 contains broad authorization for the conduct of investigations. Sections 25 and 36 authorize the Commission to bring injunction proceedings against investment companies and their officers and directors under certain circumstances. Section 31 gives the Commission the right to make periodic, special, and other examinations of accounts, books, and other records required to be maintained by investment companies. The statute is detailed and covers many functions and activities of investment companies in order to mitigate or eliminate certain abuses found to exist in the investment company field. The IFC, like the World Bank, will be created under articles of agreement among the United States and various foreign countries which will establish its status, privileges, and immunities. Such status, immunities, and privileges will have full force and effect in the United States pursuant to Federal statute. Under its governing instruments thus recognized by Federal law, the archives of IFC will be inviolable and its officers and employees immune from legal process for acts performed by them in their official capacity.1 Such status is obviously completely inconsistent with the broad jurisdiction of the Commission under the Investment Company Act over the affairs of registered investment companies. The purposes and operations of IFC, as indicated earlier in this memorandum, clearly distinguish it from the kind of investment vehicle intended to be regulated under the Investment Company Act. IFC may be considered to be a governmental instrumentality created as an adjunct of our foreign policy to help in the development of foreign countries and to further international trade. Its policy is to supplement private capital investment not to compete with it. In view of the sharp distinction between IFC and the kind of investment companies intended to be regulated under the Investment Company Act as indicated by the Commission in its investment trust study reports, as discussed in the hearings before Congress prior to the enactment of the Investment Company Act and as appears from the context of the statute, we believe that IFC is not the kind of organization Congress intended to subject to regulation under the Investment Company Act of 1940. In this respect it is similar to the International Bank to which Congress granted a special status under Federal law in 1945. Based upon its peculiar attributes as an international organization, we believe that IFC will not come within the meaning of "investment company" under section 3 (a) of the Investment Company Act if Congress grants to it the same status it gave to the International Bank. By reason of the inconsistencies between the statutory requirements of the Investment Company Act and the status of IFC under the proposed Federal enabling legislation granting it special immunities and privileges as indicated above, it would seem that to the extent that the Investment Company Act might otherwise apply to IFC, the proposed legislation will in effect establish an exception to the Investment Company Act. This view is based upon the analogy of the general rule of statutory interpretation holding that a subsequent statute clearly repugnant to and inconsistent with the provisions of an earlier statute results in an implied repeal of the earlier statute to that extent.2 (2) Apart from the foregoing considerations the Investment Company Act itself contains provisions which might except IFC, as well as the International Bank itself, from regulation under the Investment Company Act. Assuming that IFC is considered to fall within the definition of section 3 (a) of the Investment Company Act, nevertheless it may be excepted pursuant to the provisions of section (3) (c) (3) as a bank. The term "bank" is defined in section 2 (a) (5) (A), among other definitions, as a "banking institution organized under the law of the United States." IFC, like the International Bank, will be organized pursuant to the laws of each of the member countries since it is an international organization. The proposed Federal enabling legislation, insofar as the United States is concerned, may be considered to be the organizational law without which IFC could not operate or do business. Broadly. then, IFC would be a banking institution organized under the laws of the United States (3) The activities of IFC essentially will be that of making loans for reasons: of international policy and with broad governmental purposes in view. Its business will not be that of investing, reinvesting, or trading in securities for profit in the usual sense. Hence, it may be argued that IFC does not come within the definition of "investment company" under section 3 (a) (1). Al 1 In this connection it may be noted that sec. 2 (b) of the Investment Company Act provides that its provisions should not be applied or be deemed to include any agency. authority, or instrumentality of the United States, a State, or any political subdivision of a State, or any corporation which is wholly owned directly or indirectly by any of the foregoing. 2 See 82 CJS, sec. 291, and cases cited. |
