who, upon reviewing their own affairs, conclude that they may have a similar problem might proceed somewhat as follows:

First, make a careful investigation of the facts, similar, I might add, to those that have been made by the companies we have had the problem with, under the auspices of persons not involved in the activities in question, such as their independent directors.

If this investigation discloses that a problem does in fact exist, the board of directors of the company should consider in consultation with their professional advisers what types of disclosures seem to be called for.

Such companies would probably find it advisable to discuss the matter with our staff prior to filing any documents with us. Companies often do that where they have a somewhat novel problem.

In order to consider the adequacy of the proposed disclosure, our staff would need to be fully informed as to the facts.

While our enforcement activity in this area will continue, we are going forward, the foregoing procedures could lessen the need for enforcement action in particular cases, especially where the Commission is informed in advance that a company which is not now under investigation proposed to proceed in this manner.

I might just close by interpolating that the mere fact that a foreign payment has been made, particularly in a relatively small amount, is not necessarily a material fact to investors.

The customary standards in this area have been financial, what is the impact of a particular payment or activity upon the balance sheet of the company and upon its revenues and its expenses and its profits.

Many of these foreign payments superficially don't rank very high in that regard, but there are other difficulties which the chairman discussed in his statement. In any event, we don't have the same position Commissioner Alexander has, or any law that says that we use American law to judge these activities.

For our purposes, if it is an illegality question, it is whether a payment was illegal abroad, which isn't easy to find out sometimes. But there are broader questions. What will be the impact if the payment becomes public? What will happen to the company? That is material to investors. It represents difficult questions.

It also presents a sort of reverse disclosure problem. If you don't disclose, it won't hurt you, but, if you do, it will, which is the reverse of our normal pattern.

But, on the other hand, investors may plan to invest in a company, who perhaps are very interested in knowing whether it is increasing its risk by these activities.

Those are some of the types of problems which make this not a simple question for us, and, Mr. Chairman, as I say, I am happy to be here, and I would be happy to respond to any questions. [Statement of Mr. Loomis follows:]

PREPARED STATEMENT OF HON. PHILIP A. LOOMIS, JR., COMMISSIONER, SECURITIES AND EXCHANGE COMMISSION

Mr. Chairman and members of the Subcommittee:

am glad to have the opportunity to appear before this Subcommittee. As you know, I was scheduled to appear here exactly a month ago and, for that purpose, I had prepared testimony which was filed with the Subcommittee before it

became necessary for you to cancel those hearings because of urgent legislative business in the House.

Since that testimony has been made public, I will not repeat it here. In general, I then attempted to indicate how and why we became involved with the question of payments to foreign officials by American corporations, outlined the principal cases which we have brought and the reasons why we proceeded as we did, and pointed out some of the difficulties we had encountered in dealing with foreign payments. I closed on a generally optimistic note, concluding that, although the measures we had taken were painful to some people, not all of whom, by any means, were the ones who had engaged in improper activities, and gave rise to considerable concern in the business community, nevertheless, I believed that, on balance, our intervention appeared to have done more good than harm.

In response to your suggestion that I bring my prior testimony up to date, I have the following to report:

(1) While our staff has continued its inquiries in this area, no additional cases have been brought.

(2) The report of the Special Committee of the Board of Directors of Ashland Oil, Inc., which was created to investigate illegal campaign contributions and possible diversion of corporate funds, was filed with us on July 8, as called for by the decree we obtained in our action against that company. I have read the report which is a very interesting document and reflects a thorough investigation. It is directed generally to determining whether corporate funds had been diverted to political contributions, expended for unrecorded or illegal purposes, or were otherwise improperly accounted for. Some payments to foreign officials were uncovered in the course of the inquiries as to diversion of corporate funds. The identities of the recipients of these payments were not filed with the report.

(3) We have been devoting a good deal of thought to the question of foreign payments and related questions. This is an area of obvious importance and of considerable difficulty. Chairman Garrett discussed this subject, together with other matters, in a speech on June 27 before the American Society of Corporate Secretaries and I would like to submit for the record the relevant portion of that speech.

(For pages 16 through 31 of the Chairman's speech, see p. 58.)

As Chairman Garrett pointed out, what might at first glance appear to be a fairly straightforward question of corporate disclosure or corporate morality is, in fact, a very complex question of international business conduct and international relations having implications and repercussions many of which extend far beyond what we might regard as the proper province of the Securities and Exchange Commission. We are disposed to resist the idea that our mechanism of disclosure to investors should be seized upon as an all-purpose device to remedy whatever defects anyone perceives in the conduct of American business. We are developing the following general approach to our problems in this

area.

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 the treatment of 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 problem, although it seems to have existed for some years. While that omission does not, either legally or in any other way, excuse a failure to disclose material information, it presents a problem which probably should be dealt with on a case by case basis. The variety of such activities which we have encountered, and may hereafter encounter, do not seem to lend themselves to standardized disclosure prescribed after the fact.

We accordingly are attempting to develop general guidelines or minimum standards which seek to identify the type of activity in this area which, if engaged in hereafter, would appear to call for disclosure and to indicate the nature of the disclosure which would be required. The basic standard would be the question of whether or not particular information is material, that is, is it information which might be important to investors in making investment decisions. Any such guidelines would be published for comment and we will seek ideas and assistance from all interested persons.

With respect to past activities, we propose to publish a summary of the cases we have already brought together with a description of other situations of a similar nature which have come to our attention. This would be accompanied by

a suggestion that other companies who conclude that they may have a similar problem might proceed somewhat as follows:

(1) Make a careful investigation of the facts under the auspices of persons not involved in the activities in question, such as independent directors.

We accordingly are attempting to develop general guidelines or minimum standards which seek to identify the type of activity in this area which, if engaged in hereafter, would appear to call for disclosure and to indicate the nature of the disclosure which would be required. The basic standard would be the question of whether or not particular information is material, that is, is it information which might be important to investors in making investment decisions. Any such guidelines would be published for comment and we will seek ideas and assistance from all interested persons.

With respect to past activities, we propose to publish a summary of the cases we have already brought together with a description of other situations of a similar nature which have come to our attention. This would be accompanied by a suggestion that other companies who conclude that they may have a similar problem might proceed somewhat as follows:

(1) Make a careful investigation of the facts under the auspices of persons not involved in the activities in question, such as independent directors.

(2) If this investigation discloses that a problem does in fact exist, the Board of Directors of the Company should consider in consultation with their professional advisers what types of disclosure seems to be called for.

(3) Such companies would probably find it advisable to discuss the matter with our staff prior to filing any document with us. In order to consider the adequacy of the proposed disclosure, our staff would need to be fully informed as to the facts.

While our enforcement activity in this area will continue, the foregoing procedures could lessen the need for enforcement action in particular cases, especially where the Commission is informed in advance that a company, not now under investigation, will proceed in this manner.

Mr. Nix. We are happy to have you. Commissioner Loomis. In the document submitted for the record a short time ago by you. I understand that you indicate there how and why you became involved with the question of payments to foreign officials by American corporations. That was covered.

In addition thereto, you outlined the principal cases which you brought and the reasons why you proceeded as you did.

No. 3, I understand in that document there is pointed out some of the difficulties that you have encountered in dealing with foreign payments. That is

Mr. LOOMIS. That is correct, sir. That is what I meant to say at that time.

Mr. Nix. Now, you mentioned corporate morality. How do you categorize corporate morality at this time?

Mr. LOOMIS. Well, as I mentioned, regarding corporate morality in general, that we are not the guardians of that subject, we may not be very expert on it, but I suppose we will have to categorize it as something which the community, the public, regard as evil or improper or something which should not be done.

Mr. Nix. Now, I understand that you proposed as to past activity to publish a summary of the cases that you have already brought, together with a description of other situations of the similar nature which have come to your attention, and that would be accompanied by a suggestion that other companies who conclude that they have been in similar problem-have a similar problem might proceed, and you set forth the way in which they might proceed.

Is that included in the document that has been submitted for the record?

Mr. LOOMIS. Yes. That is in my current testimony which I would like to have submitted for the record, the statement of this day, July 17. Mr. Nix. I think that is a matter of record.

Mr. Solarz.

Mr. SOLARZ. Mr. Chairman, I was about to go to meet the quorum call, and, with your permission, if I could do that and then come back and begin the questioning with some of the other members.

Mr. Nix. The subcommittee will stand in recess until the return of the members. It should not take over 6 minutes.

[A short recess was taken.]

Mr. Nix. The subcommittee will be in order.

Mr. Whalen.

Mr. WHALEN. Thank you, Mr. Chairman. Commissioner Loomis, I thought we might just follow the same scenario that we did with Commissioner Alexander.

As I understand it, your concern and the thing that prompted you to take action was not the bribes per se, but rather the failure to fully disclose.

Mr. LOOMIS. Failure to full disclose information that-was material to investors. I might add that one of the ways in which it particularly came to us is what Commissioner Alexander describes as slush funds. When you do that, you tend to make your financial statements false or misleading, and that creates a matter of particular concern to us.

Mr. WHALEN. Now, you have indicated the leverage that you have in correcting these violations. One is through the use of the injunction, which is authorized through section 21(e). Your statement also describes some administrative procedures you might follow.

Are there any criminal penalties, however, which can be levied against violators, those who have failed to fully disclose?

Mr. LOOMIS. Yes. Not if everything is fully disclosed, but there are criminal penalties for fraud in connection with securities transactions that might possibly be involved in this area, and there are also criminal penalties for filing false information with us, but again you have to show, as Commissioner Alexander pointed out, more than the fact that it was done, but that it was done with criminal intent.

Mr. WHALEN. Perhaps we can take a specific example. A corporation pays an official in country X for certain services. This is a violation of the law in country X. It, I suppose, in no way materially affects the value of that stock in the United States. However, full disclosure of this was not made. Perhaps it enhanced the value of the stock, you might even say.

Your concern is, then, full disclosure.

Mr. LOOMIS. Yes, that is correct. The fact that it is illegal and wrong, I think, would be relevant to our concern only if the fact that it was illegal created a situation which called for disclosure.

A simple example is if it is illegal abroad, the company might be thrown out of that country. If so, that might be a fact that investors should know about.

Mr. WHALEN. Obviously, as Commissioner Alexander has testified, if that payment is claimed as a deduction, then the IRS can act. Mr. LOOMIS. Yes.

Mr. WHALEN. I think perhaps the key to your testimony is contained on page 13 of your June 17 statement, and that is-and I am quoting:

"The Commission will act when specific information is brought to its attention."

You have indicated that you acted as a result of the Watergate hearings.

Mr. LOOMIS. The Special Prosecutor's prosecution of that.

Mr. WHALEN. You mentioned also, I think, one instance when the president of a corporation committed suicide. Let me put it this way. Were it not then for Watergate and its related investigations, these incidents would probably not have been uncovered.

Mr. LOOMIS. We only got into this area in the first place as a result of the Watergate prosecutor's activities. Of course, we have gone beyond what he was concerned with, and whether the situation would have broken in such a way as to attract our attention otherwise is merely speculation, but I don't want to say that we will only act when specific information is brought to our attention, because, as I said in that prior statement, "or when our staff detects circumstances indicating a possible pattern of activity which warrants enforcement action." It goes both ways.

Mr. WHALEN. But the SEC had not uncovered that.

Mr. LOOMIS. No, we had not.

Mr. WHALEN. Would you conclude, than, that your capacity for investigation of illegal activities by American corporations in foreign countries is very limited?

Mr. LOOMIS. It becomes very difficult because of the fact that this is often done by transmitting money abroad, and, when it gets there in many countries, there is a rule that financial transactions occurring in those countries and financial activities in those countries are treated in secrecy by the law in that country, and if one of our investigators should go over there and try to investigate financial transactions, he might wind up in jail.

It is difficult for us to deal with activities that are occurring abroad. Mr. WHALEN. Prior to Watergate, did you undertake any investigations which did not result in the pressing of charges?

Mr. LOOMIS. In this general area? Do you know of any?

STATEMENT OF WALLACE L. TIMMENY, ASSOCIATE DIRECTOR, DIVISION OF ENFORCEMENT, SECURITIES AND EXCHANGE

COMMISSION

Mr. TIMMENY. I don't know of any, sir, that we undertook that did not result in charges with respect to payments overseas.

Mr. WHALEN. Or to put it another way, were at any time your investigators suspicious of activities abroad by American corporations? Mr. TIMMENY. Not with respect

Mr. WHALEN. Those suspicious being unprovable?

Mr. LOOMIS. Well not, if I might add-Mr. Timmeny can correct me-not with respect to payments abroad. We have been suspicious of some other things that go on abroad, but not payments abroad.

Mr. WHALEN. In connection with alleged bribery of foreign officials, illegal political contributions, has the Commission at any time ever been approached by representatives of foreign governments in an effort to elicit your help?

Mr. LOOMIS. Well, not before the fact, so to speak. When some of these cases were uncovered, at least in one case, officials of a foreign