Nor can I say whether the expenditures that may be made disclosable or forbidden by legislation will be in terms of illegality under our laws if made in this country-the present approach as to deductability under the Internal Revenue Code or illegality under the laws of the country where made. The State Department has expressed the view that either approach would be resented by many foreign countries. Some countries, at least, regard it as arrogant on our part, rather than helpful, for the United States to presume to protect them from the venality of their own officials. Indeed we have learned that in Central America serious credence is given to the suspicion that our Commission's celebrated concern for corporate disclosure is a cover story. What we are really doing is substituting for the CIA in trying to topple local governments while that agency's attentions are otherwise occupied-a misapprehension that would be amusing were it not pitiful.

Let me discuss some features of the disclosure problems that seem clear and some that do not.

First, it is clear that there are a great variety of practices among countries and among companies. It is far too simplistic to say that corruption is a way of life in most foreign countries and that everybody knows that no one can do business abroad without regular bribes, etc. The truth is much more complicated. The game, if one wants to indulge in it, is played differently in different countries and at different times. It evidently also is played differently by different players-some seeming curiously ready, almost eager, to find reasons to conclude that foreigners are naturally corrupt and that some kind of monkey business is required in order to get anything done; others, willing to do business only on the merits.

Second, the significance of this illegality and immorality is far from clear in all instances. Are we saying that every improper expenditure must be disclosed, as such, giving details, because it is improper regardless of other considerations? We are not saying that. At least we have not said it so far, and I, at least, do not propose that we should ever say it. But one must acknowledge the momentum of logic, the often irresistible trend of collective thinking in this sort of process-stimulated in the courts by the ingenuity of counsel seeking new grounds of recovery. Stimulated, also, among publicists and others by that institution so strong, if not virulent, today that Bayless Manning, in another context, once dubbed the "purity potlatch." So I would not presume to predict just where this all will end.

Commissioner Sommer, as well as Commissioner Loomis, in a recent talk on this subject, asserted that we are not concerned with corporate morality as such-just disclosure of material facts. It offends some within our own ranks to make this assertion. How can a government agency with such widespread responsibility for working toward the public interest and the interest of investors disclaim any concern for corporate morality? How, indeed! We have showed an abiding and increasing concern for corporate morality in the treatment of investors, present and potential. We have not shown the same concern for external morality, so to speak-how the corporation treats the rest of the worldunless it is breaking the law in a manner and to a degree that might be expensive for investors, in terms of cost or otherwise. Then, but only then, we have said, investors should know.

Is this enough? One reason for saying it is enough-and declining to embark on a program to smoke out, and thereby discourage all forms of improper external behavior-is the enormity of the task. Despite strident accusations to the contrary, we do not regard ourselves as having a mandate to enforce, even indirectly, through compulsory disclosure, all of the world's laws and all of its perceptions of morality and right conduct. Some forbearance not only seems implicit in our governing statutes, but also may be essential to enable us to continue to do a competent job of investor protection.

But the question is asked whether investors should not be protected against, unknowingly, investing in a company whose external behavior is illegal, or at least breaks a law that they happen to feel strongly about, or deviates from their moral code. This is by no means a frivolous question. It is at the heart of the recent proposals of the Natural Resources Defense Council that we require disclosure in 10-K's and registration statements of all deviations from the National Environmental Protection Act and the Equal Employment Opportunity Act. There is no impropriety in my revealing that the Commission, in the past, has been reluctant to adopt these proposals. It was our declining to do so and the manner in which we declined that led the District Court to hold that we had denied the Council due process, which led to our hearings last

spring on those and similar proposals. We have not completed our review of the results of those hearings, nor have we yet received the staff's recommendations, so there remains open at least the possibility that we may in some degree change our position.

If we do, will we have opened the door to further intrusions, conceivably even by the Congress, that our filing and disclosure procedures and requirements be used to help enforce policies increasingly remote from investor protection in the classical, or financial and economic sense? If our processes should become so encumbered, we very much fear that they will become less effective for this primary purpose. We also fear that if we are given or undertake too many tasks, we will not do any of them very well.

As you can see, if we require disclosure of all violations of laws against bribery or political contributions on the ground that illegal payments are material per se, we may be hard pressed to explain that other illegal corporate acts are not equally material for the same reason. We do not doubt that there are some investors who really care about how lawfully a company's business is conducted. There undoubtedly are such persons, although they seem to be selective about which violations of which laws they are concerned about, and it sometimes appears that the loudest importunings come not from investors who care about a company's conduct but by persons who care about a company's conduct and become, or assert that they might become, at least nominal investors to achieve standing.

Now, if improper foreign expenditures are not to be regarded as material simply because they are improper, without more, what principles govern the separation of those that are material and those that are not? Is it the method by which payments are made, the size of the payments, the purpose for which they are made, or the hazards to the business for exposure of the payments? It is, I believe, all of these, in different proportions in different situations.

The method may be material in itself, where it takes the form of a wellcontrived program by top management to generate substantial funds through false book entries that are converted into cash and thereafter unaccounted forso-called laundered money. When hundreds of thousands of dollars are put through this process and thereafter disbursed in cash for shady, if not always clearly illegal, purposes, that seems to us to be a material deviation from sound accounting practice and therefore should be disclosed, even though the aggregate sums might be small related to revenues, so that if the discrepancy had arisen in some other manner, no particular attention to it would be called for. Phoney book entries and unaccounted for funds are wholly inconsistent with financial integrity. When they are deliberately produced by the conscious policy of top management, or its benign neglect, the problem is serious and investors ought to know about it. This would be true even if the laundered money was in fact disbursed for perfectly proper purposes, although we are not likely to see that case. Why have officers carrying around hundreds of thousands of dollars in hundred dollar bills in brief cases, flying the cash back and forth to foreign countries, only to spend it for proper purposes? One might as well mail a check, and book it properly.

Suppose, however, nothing so dramatic is involved. Instead we have the fullyaccounted for fix-fully-accounted for but not separately reported and probably booked in some euphemistically titled account. But the company knows exactly where the money went and why. Or, instead, the substantial sums are paid to some misty figure abroad who charges exorbitant fees and good things happen, but how much of the money he retains and how much is passed on to whom is the consultant's secret. The company does not know, in part because it does not want to know, thus enjoying the appearance of purity along with the pleasures of sin-an arrangement not unknown in other contexts.

Should such transactions be separately identified and reported? If so why, unless impropriety alone is sufficient ground? One argument for disclosure is the riskiness of it all, what Robert Burns called the hazard of concealing. Burns was talking about sex-extramarital sex-and must have been composing in an uncharacteristic moment of morning-after fear and remorse. The whole verse

goes:

I weigh the quantum of the sin,
The hazard of concealing.

But, ach, it hardens all within
And petrifies the feeling.

On reflection, the verse may have more to say about the circumstance we are considering than first appears, except that the argument I am pursuing does not

"weigh the quantum of the sin, the hazard of concealing." That hazard, coupled with the damaging consequences of exposure, may be quite material in evaluating the quality of earnings from the segment of business thus procured or affected. Is it not material to an investor that a company's profitable business of selling a product in or to another country is obtainable and retainable only by making substantial clandestine payments to the husband of the niece of the chief of state, which payments, if exposed, would cause the business to cease and massive retaliation to be inflicted?

It seems to me that I would want to know that if I were considering investing in the company, although I might speculate on the specific hazards in the specific country. Graft is evidently more hazardous in some countries than in others. It is also true that present, as against prospective, investors in the company might have a different attitude. They might reasonably say, "Perhaps I would have appreciated this bit of intelligence before I bought any stock, but now that I have it, don't tell me, since you can't tell me without telling all the world and blowing the whole deal."

Is this a point of view that is entitled to respect? Is it reasonable for us to say that you must disclose transactions that would be damaging if disclosed because of the hazard that they might be thus guaranteeing the damage the risk of which compels the disclosure in the first phase?

There are thus instances where the requiring of disclosure causes loss to present shareholders for the benefit, so to speak, of prospective shareholders. They open us to the charge that we are precipitating immediate and certain loss to an identifiable group of innocent investors for the sake of conferring uncertain protection to the amorphous universe of potential investors. Certainly, present shareholders who suffer the loss do not regard us as their friend. It might seem more reasonable for shareholders' displeasure to be directed toward the authors of the hanky-panky, meaning management, but we suffer some of the fate of the messenger of bad news. Unhappily, the consequences of taking a position for protection of present investors, from the public point of view, generally seems worse, because the protection amounts to condonation of concealment which may not work for long anyhow. If we are to preserve faith in the integrity of a continuous disclosure system for our capital markets, the balance must generally, if not in every case, be drawn in favor of prompt disclosure.

This bias in favor of prompt disclosure is reinforced by the lessons of experience leading to the conclusion that the secret will not long be kept inviolate in any event, and as the news begins to get around, the opportunities and temptations for bail-out multiply. Certainly that seems to be the case in the area of improper foreign payments. How long the old situation could have endured had not Watergate and its aftermath caused us to start peeking under the sheets we will never know. I have the strong conviction that something would have attracted public attention to these practices in any event, but whether or not that is so, public attention is there now, and it is not going to go away.

All improper foreign payments, of course, are not big bribes. Many of them are small and in the foreign community where made possibly not really regarded as improper at all. If the local plant manager in a foreign country has to slip a weekly mordita of modest amount to the postman in order to get regular mail deliveries, or to the customs inspector, the fire inspector or the tax collector, is that something for us to get excited about? In our public statements, individual members of the Commission have said no, at least where these payments conform to custom and usage. Similar payments, at the local level, anyway, are not unknown in the United States. That is certainly my current view, even though there is some difficulty in formulating the rationale for the distinctions implied. Arguably these payments have none of the attributes of the big bribe-they do not appear to be at all hazardous in some countries-at least so long as discretion is preserved. As I stated earlier, however, it is difficult to predict what the final position of our law will be.

We are fully aware of the widespread confusion and dismay created by these exposures to which we have contributed. They have, in some instances, shattered individual careers and fortunes, placed heretofore profitable lines of business in jeopardy, disrupted foreign governments, and led to bitter recriminations in many quarters. It has all been a sad thing to watch, and it is not yet over.

We hear the er post facto complaint of corporate executives-that they are being singled out for pillorying and worse for doing what seemed in their shareholder's interests according to the rules of the game as actually played. This can be, and is being, overstated. In many cases it seems clear that the participants

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have not thought that what they were doing was right, however necessary they had persuaded themselves these practices were. When sound policy dictates effective and decisive action, we must proceed even against the executive who succumbs to extortion under severe pressure.

We have been deeply concerned with the affect these revelations have had and may have on our relations with foreign governments, political as well as economic. In an effort to understand this aspect, we have gone to some trouble to consult with other departments of the government. Some businessmen have, no doubt, hoped that State or Defense or Treasury or someone would tell us to sit down and stop rocking the boat. Some others have suspected them of doing so, or trying to, but such is not the case. Instead, we get the strong impression that, while regretting the necessity, as do we, they recognize it and agree that we should proceed.

But we are not happy at the thought of simply more investigations, more consent decrees and more painful exposure without the development of sound policy guidance for American business abroad. We are not certain how this policy will or should be developed. It does not seem properly the sole, maybe not even the primary province of the SEC.

A number of policy approaches have been suggested in different quarters. Representatives of the State Department, testifying before the House Committee on International Relations, have suggested the possibility that various nations sit down to develop guidelines to the appropriate conduct of multinational corporations. Mr. Mark Feldman, Deputy Legislative Advisor of the State Department, who did the testifying, suggested that such a code might include a special provision to the effect that foreign investors neither make, nor be solicited to make, payments to government officials or contributions to political parties or candidates. Such an approach, while intellectually appealing, strikes me, at best, as a long range, and possibly ponderous, route to the resolution of the problems facing American companies today.

We could, no doubt, promulgate disclosure guidelines which would require the detailing of these matters for investors. Commissioner Sommer, on the other hand, has suggested that multinational corporations making payments abroad be required to disclose, generically, the existence of such a corporate practice, and perhaps, the extent to which it's engaged in, without specifically identifying who got what. Whether the underlying details could be kept confidential, once their existence is disclosed, is another matter. In the present atmosphere one must confess to doubts. Alternatively, we could try to distinguish between types of payments-for example, not requiring disclosure of payments made merely to expedite action government officials otherwise would be required to take, but requiring disclosure of all or most payments designed to get foreign officials to take action improper, or that they otherwise would not take. Even this approach has some inherent and rather obvious analytical deficiencies.

On balance, I do not think we can escape from the fact that American businesses desperately need guidance in the conduct of their business overseas. Those companies that might not otherwise want to make improper payments abroad feel compelled to do so by virtue of competitive pressures that I think Commissioner Evans would describe as the pressure to succumb to the lowest common denominator of corporate behavior.

The alarm and despondency spread by these developments is not, of course, limited to company management. The public accounting profession feels caught in the middle and peculiarly exposed. After discussions with some leaders in that profession, we are seriously considering engaging in joint effort, probably through an accounting series release, to provide auditors with some guidance in rendering opinions on published financial reports. The auditor's responsibility cannot be considered wholly apart from that of the company itself, but it does have some separate aspects, and they are certainly entitled to some understanding of what is expected of them.

While this whole business ultimately may be something for the Congress to decide, as some have suggested, I am inclined to believe that the most immediate and most effective resolution of the problem can best come from American companies themselves. For only if American companies communicate with each other, and attempt to articulate a commonly agreeable standard, in full recognition and understanding of the competitive pressures they commonly face, can a workable solution evolve without the hazard of placing those firms who seek to conduct themselves in an upright manner at a competitive disadvantage.

The establishment of some collective understanding, in my view, is desirable, whether or not legislation is ever enacted in this area, since such an understand

ing could appropriately form the basis for any legislative resolution of the problems we have been discussing this morning. If that seems as if the Commission is passing the buck, I think that is a misimpression. We can attempt to set guidelines, but in the end I suspect we will all be less than satisfied with the product of our efforts, unless they are predicated upon actual business experience after consultation with those who have that experience. We can make our offices available to sit down and talk over matters concerning, doing business abroad. In the long run that is where the solution must come from, since that is where the problem originated. I expect, shortly, to see whether such conversations can be begun. We welcome suggestions in that direction. In the meantime, however, lest there be any doubt as to the official American policy:

"Illicit contributions and their disclosure can adversely affect governments, unfairly tarnish the reputation of responsible American businessmen, and make it more difficult for the United States Government to assist U.S. firms in the lawful pursuit of their legitimate business interests abroad."

So said Mr. Feldman on behalf of the Department of State, and we heartily

concur.

Mr. LOOMIS. As he there pointed out, this becomes a very complex question for us, and we tend to be disturbed by the idea that our mechanism of disclosure to investors be utilized as an all-purpose device to remedy whatever anyone perceives to be going wrong in the way the corporations operate.

We have been trying to develop a general approach to our problems in this area. In that connection, it appears appropriate to separate to some degree the question of establishing standards or guidelines with respect to the application of the Federal securities laws to corporate activities of this sort, which may occur in the future, from such activities which have occurred in the past.

This seems desirable for several reasons. In the first place, we have not heretofore had any specific disclosure requirements addressed to this particular problem, partly, I might add, because we didn't know of its dimensions or prevalence or of its materiality to investors, although the problem seems to have existed for some years.

Now, the fact that we have no specific requirements does not either legally or in any other way excuse the failure to disclose information required to be disclosed, because it is material, but it does present a problem which probably should be dealt with on a case-by-case basis. The variety of the activities we have encountered and may hereafter encounter, as they have occurred in the past, do not seem to lend themselves to standardized disclosure requirements prescribed after the fact.

We are, accordingly, as to the future, attempting to develop general guidelines or minimum standards which seek to identify the type of activities which, if engaged in hereafter, would appear to call for disclosure and indicate the nature of the disclosure which would be required.

The basic standard would be whether or not the particular information is material, which for our purposes means information which might be important to investors in making investment decisions.

Any such guidelines would be published for comment, and we will seek all the help we can get.

With respect to past activities, we propose to publish a summary of the cases which we have already brought, together with a description of other situations of a similar nature which have come to our attention, and accompany this by a suggestion that other companies