we are balancing the surveillance as to market operations and purchasing by the bank under the strict supervision of the NAC. That is the position of our Commission here that that is the balancing factor that we would assume would only be proper.

The CHAIRMAN. Well, yes. I have noted all through these hearings, both from the testimony given by Mr. Black and also from the communications that have been received from the SEC and others that there is considerable dependency placed upon the rights-whatever they may be of the National Advisory Council, and it would seem as if everybody wanted to say because the National Advisory Council does this or does that, or should do this or should do that, it is therefore all right.

I have not been convinced yet as to just what the National Advisory Council's rights in this matter are and how far they take over the duties that ordinarily would be performed by the SEC. I have not been convinced on that yet.

Mr. BENNETT of Michigan. Coming back to the NAC-I would relate this question to your counsel. What is there in this amendmentI do not know that I have read it in full-but as I understand the authority of the National Advisory Council is that they review the operations and effect of the bank's activities for a 2-year period and they report to the Congress, so that the Congress gets the benefit of a report or a summary of 2 years' activities.

I do not gather from the amendment-I may be wrong that the National Advisory Council goes into the bank and supervises the various transactions of the bank, but on the other hand looks them over after a year or 2 years elapse and see whether there is anything wrong with them. What are the facts?

Mr. Loss. I suppose you are quite right, sir, under the bill. It is my understanding that the Council does have rights and duties under the Bretton Woods Agreement Act. Therefore I suppose Mr. Luxford, for the bank, could advise you a good deal better than I could.

Mr. BENNETT of Michigan. I do not think that there is anything in the Bretton Woods Agreement Act about that authority, because with respect to the matter we are discussing, it was the intent of Congress when the act was passed that the Securities and Exchange Commission should retain jurisdiction. I do not think that the original act-I have not looked at it lately-but I do not think that the original act even contemplated that the NAC was going to substitute itself as a supervisory body in place of the Securities and Exchange Commission.

Mr. Loss. That is clear, undoubtedly, so far as section 9 is concerned. What is in my mind-and the Commission's point of view, I believe is that the NAC as an agency of the Government must-and I do not know just where it gets this duty-but I understand it does have the duty to pass on any sinking-fund operations or other purchases of bonds by the bank, and presumably that duty would be fully exercised. As to that I am no expert, by any means.

Mr. BENNETT of Michigan. At least it is not in this bill.

Mr. Loss. Not as written. I have read the bill. That is right. But I believe it is found elsewhere. Where, precisely, I do not know. Mr. BENNETT of Michigan. I wonder if we could have a statement from the bank's counsel on that.

STATEMENT OF ANSEL F. LUXFORD, ASSISTANT GENERAL COUNSEL, INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOP

MENT

The CHAIRMAN. Will you give your name and position you occupy? Mr. LUXFORD. Ansel F. Luxford, Assistant General Counsel, International Bank.

Section 4 (b) (4) of the Bretton Woods Agreement Act provides that whenever, under the Articles of Agreement of the Fund or the Articles of Agreement of the Bank, the approval, consent, or agreement of the United States is required before an act may be done by the respective institutions, the decision as to whether such approval, consent, or agreement shall be given or refused shall be made by the Council under the general direction of the President.

Now, under the Articles of Agreement of the Bank, the Bank cannot issue any securities or guarantee any securities in the markets of the United States or buy or sell any securities in the markets of the United States without the approval of the United States Government.

The CHAIRMAN. Now, will you read that section again into the record?

Mr. LUXFORD. I will be glad to. I refer to article IV, section 1, of the Articles of Agreement of the International Bank, Part (a) provides that the Bank may make or facilitate loans which satisfy the conditions of article III of any of the following ways: First, by making or participating in direct loans out of funds raised in the market of a member or otherwise borrowed by the Bank; second, by guaranteeing in whole or in part loans made by private investors through the usual investment channels. The Bank may borrow funds or guarantee loans only with the approval of the member in whose markets the funds are raised and the member in whose currency the loan is denominated and only if those members agree that the proceeds may be exchanged for the currency of any other member without restriction.

Tying that in with the Bretton Woods Agreement, that approval can only be given by the National Advisory Council.

Now, there is one other reference that is relevant to this same point. The CHAIRMAN. Just before you pass that, again, is that decision dependent upon the NAC?

Mr. LUXFORD. Yes, sir. This provides that the Bank may only borrow funds with the approval of the member-that is the United States, in whose markets the funds are raised.

The CHAIRMAN. I understand it is given the veto power.

Mr. LUXFORD. That is right.

The CHAIRMAN. But, it does not, in my opinion, go to the point of necessarily setting the NAC up in the same category that the SEC is to pass upon these questions, and require disclosure and all of that sort of thing.

Mr. LUXFORD. No, Mr. Chairman. I would not want to suggest to you that this provision in the Articles of Agreement of the Bank has anything to do with that. That is the question between Congress and the National Advisory Council. But what I was pointing out just now is the basic constitutional right of the United States Govern

ment to say yes or no on any security issued or guaranteed in this market, and further than that, it has the same constitutional right to say yes or no, so far as the Bank buying or selling its securities in this market is concerned.

Mr. BENNETT of Michigan. That gives it greater power than the Securities and Exchange Commission has.

Mr. LUXFORD. That is right.

Commissioner HANRAHAN. That is right.

Mr. BENNETT of Michigan. What in effect does it do to give the Bank, working with this National Advisory Council, that authority. Is there discretion to say yes or no either on the manipulation of securities or on any other feature of the transaction?

Mr. LUXFORD. It gives that power to the NAC. I do not believe the SEC has it.

Mr. BENNETT of Michigan. I say, working together, they have that authority. So the point I was making is that in trying to distinguish here between them, the distinguishing fact is the NAC is not at all a supervisory agency in the sense that Congress set up the Securities and Exchange Commission, because their authority is on an entirely different basis. In the one case the Securities and Exchange Commission has to follow strict statutory rules and regulations, while in the other case the National Advisory Council is given arbitrary power as to whether or not a particular security should be handed over to the public, with or without information.

Mr. LUXFORD. I would only have one comment on that. You are quite right that the Congress has not spelled out standards for the National Advisory Council. On the other hand I do believe where you have the National Advisory Council, which consists of the Secretary of the Treasury, who certainly does a good deal of marketing himself of Government bonds; when we have the Chairman of the Board of Governors of the Federal Reserve; when we have the Secretary of State and the Secretary of Commerce and the Chairman of the Board of the Export-Import Bank sitting as a council and realizing the responsibilities incident to saying yes or no, particularly in the light of the record that is presently being made, speaking only as an individual, it would seem to me that it would be extremely difficult for that council to overlook the interests of the public, when it says yes

or no.

Mr. BENNETT of Michigan. But would you not agree when Congress passes this proposed bill or amendment that what it in effect says to the National Advisory Council is, we are placing these securities in an exempt class. We have specifically put them in a preferred category. Now, if Congress has put these bonds in a preferred category, which it must do if they pass this bill, then why should the National Advisory Council put them on any other basis?

Mr. LUXFORD. Mr. Congressman, if I were on that Council, I would say that I would be derelict in my duty if I were to take that interpretation after I read this report. If there is anything that is plain from reading this record, it would be that Congress only made that exemption on the basis of the fact that the National Advisory Council was going to operate; it was going to do more than act perfunctorily in saying "Yes" or "No" on issues.

Mr. BENNETT of Michigan. Yes; but the Council would read the law; nothing is said in this act about the matters we are discussing.

The bill as drawn simply exempts these securities; puts them in a preferred category.

Mr. LUXFORD. Well, Mr. Congressman, that might have been true prior to the amendment which the bank offered yesterday; but I do believe if you look at that amendment, that the NAC is being asked to advise Congress every 2 years on whether or not the interests of the public are being protected, that it would be a very, very distorted interpretation by the NAC of its authority to proceed to say, "Well, it is true that we have to comment on that, but we certainly do not have to pay any attention to it in giving our approval or disapproval." It seems very difficult to me to come to that conclusion.

Mr. BENNETT of Michigan. Well, it certainly would be clear that they would start off by putting these securities in a special and preferred class. There is not any question about that.

Mr. LUXFORD. Well, you would be doing that, that is a fact.

Mr. BENNETT of Michigan. That is what I say, and, of course, following that they would also

Mr. LUXFORD (interposing). But I think in the light of this record, that they would be very careful as to what they were to do.

Mr. BENNETT of Michigan. I think they should be.

Mr. LUXFORD. I am quite sure that this record is very complete on that point. Well, I did not me in to interrupt you.

Mr. BENNETT of Michigan. I am glad to have that information. Commissioner Hanrahan, do you think if this legislation were passed, we would soon be confronted with requests by all foreign governments to give their own securities the same kind of preferential treatment that we propose to give indirectly to their securities under this bill?

Commissioner HANRAHAN. I do not think so. It is difficult for me to answer. I mean, I am not in the international bank field at all.

Mr. BENNETT of Michigan. But, we are opening the door here for less restrictions on foreign securities, indirectly. Now, the next step naturally would be to do directly what you have done indirectly, would it not?

Commissioner HANRAHAN. Well, I think we would oppose any move like that.

Mr. BENNETT of Michigan. Well, these securities of foreign governments, the direct securities of foreign governments are not any different than securities of the World Bank after the United States has paid in its assessment.

Commissioner McCONNAUGHEY. I think that states it a little. broadly. After the United States contribution is exhausted, I understand that I hope someone will correct me if this is not correct-the dilution that would occur would be a pro rata dilution rather than leaving the subsequent securities completely unbacked, foreign securities.

There would be in essence a retroactive dilution of the security behind the securities already issued. You are dealing here with something quite different, it seems to us, from a foreign government security of the ordinary type, in two particulars: First, these would be either obligations of the bank or guaranteed by the bank, which would include the capital contribution that has been so fully discussed; second, before they can be sold they would have to pass the surveillance of the Advisory Council.

Having those characteristics, if this bill should be passed, they would be exempt from the particular kind of protection that is afforded to American investors by the requirements of the Securities Act and the Securities Exchange Act.

Foreign securities coming directly to the American capital markets would not have the obligation of the bank in the first place. In the second place they would not have a preview by the NAC with whatever obligation it has to look out for American investors.

And, although I cannot speak for the whole Commission, I can speak for myself, and I should think that we would be definitely in opposition to any exemption applying there.

You are dealing here with quite a different sort of thing, because you do have in this case, first, the protection of the bank's obligation, backed to the extent that it is backed by capital contributions by the United States Government

Mr. BENNETT of Michigan. Let us talk about the situation after the United States Government's capital contribution is in.

Commissioner McCONNAUGHEY. You still have the NAC and you still have whatever portion of the United States capital contribution would be applicable to that security, pro rata.

Mr. BENNETT of Michigan. Yes.

Commissioner MCCONNAUGHEY. Over the entire amount of outstanding securities.

Mr. BENNETT of Michigan. So every time you issue a security, after the United States pays in its contribution, you would weaken every other security that had been previously issued.

Commissioner MCCONNAUGHEY. There is no question about that. Mr. BENNETT of Michigan. So up to the time the United States pays in its contribution you have got something that is equivalent to a Government bond?

Commissioner MCCONNAUGHEY. Yes, sir.

Mr. BENNETT of Michigan. If I bought a security issued by the band today and held it until the time that the Government had paid in its contribution I would practically have a Government bond; but if I held it beyond that time-if it were not due until beyond that time-then my bond would be weakened to the extent that the United States Government was not behind the bonds that were issued after that.

Commissioner MCCONNAUGHEY. That is correct; that is a correct analysis according to my understanding.

Mr. BENNETT of Michigan. Then, the point I am making is this: If there is justification for these World Bank securities standing in a preferred class during this time that the United States Government supports them, where is the justification for them standing in any preferred class after that time?

Commissioner McCONNAUGHEY. I will ask Mr. Loss to discuss that. Mr. Loss. There is an analogy there that occurs to me, Mr. Bennett. There are several examples that can be used under the Securities Act. There is an exemption for securities that are subject to approval of the Interstate Commerce Commission. Now, their functions are quite different from ours. The Interstate Commerce Act, section 20a, which has to do with the issuance of securities, is not a disclosure statute. We operate on different standards. Nevertheless Congress felt, and we think quite properly so, that there was an adequate sub