their experiences with the Fund of Funds in the 1960's. The United Kingdom and Canada regulate the operation of investment companies directly, through extension of their securities laws, but a new comprehensive law regulating mutual funds in Canada has recently been proposed by the Dominion government.

Extraterritorial Application. Because of the broad reach of U.S. securities laws and the active role of the Securities and Exchange Commission in enforcing them, both the SEC and private plaintiffs have sought in many cases to extend those laws to transactions occurring partly or wholly outside the United States, and U.S. courts have accepted jurisdiction in many such cases. In light of the generally more limited scope of foreign securities laws and the absence of an agency comparable to the SEC, no similar development was found in any of the other countries studied.

Restrictions on Foreign Investment

The eight foreign countries covered by this study restrict the nature and quantity of foreign investment in their domestic economies in many ways. The reasons for such prohibitions may include: fear of losing control over natural resources, maintenance of self-determination over national economic affairs, prevention of economic instability, control of inflation, and distrust of multinational corporations. These restrictions are generally imposed to limit direct foreign investment; limitations on portfolio investment are normally not intended. Nevertheless, to forestall the possibility of foreign investors becoming a dominant force in domestic enterprises, foreign countries often limit the percentage of foreign capital participation in particular enterprises or require government approval or prior disclosure of such investments. These provisions may affect large portfolio investors. Also, many foreign countries, like the United States, prohibit or sharply restrict foreign ownership in certain "sensitive" industries.

The laws of the eight countries vary greatly in their approaches to foreign investment. Several countries are currently changing their attitudes towards foreign investment, but in different directions: Some are in the process of liberalizing their foreign investment laws, while others are imposing new limitations on the ability of foreign investors to participate in or control sectors of their economies.

The United States has imposed few limitations on foreign stockholdings compared to the eight foreign countries studied. Unlike Australia, Canada, and Mexico, the United States has had little recent experience with foreign control of major sectors of its economy. Germany and Switzerland are the only two of the eight foreign countries which have relatively restriction-free investment laws comparable to those of the United States.

The United States imposes restrictions on foreign. holdings in certain "sensitive" industries such as atomic energy, banking, communications, hydro-electric power, transportation, and some government contracting. These restrictions, based primarily on national security reasons, are similar to those of other countries. Canada,

for all practical purposes, precludes foreign control of Canadian airlines, railroads, shipping, and communications industries. Japan has limited to a small fixed percentage the amount of foreign ownership of enterprises involved in waterworks, railroads, electric and gas utilities, fisheries, maritime and road transport, mining, radio, television, port and harbor operations, and banking. In Great Britain, shipping is closed to foreign investors.

Also, some countries have nationalized their basic industries, thereby precluding all private investment, foreign and domestic, in these vital sectors. In France, for example, the telecommunications system, radio and television broadcasting, railroads, and electric utilities are all public enterprises. The Mexican Government has a monopoly over the nation's petroleum and hydrocarbons industry, basic petrochemicals, radioactive minerals and nuclear energy, certain mining activities, electricity, railroads, and telegraph and radio communications.

The United States differs from most countries in that it imposes few foreign investment restrictions. Other countries, on the other hand, generally restrict foreign investment in sectors thought economically important or where such restrictions are merely desirable. For example, Australia's recently enacted Companies (Foreign Take-Overs) Act limits foreign control of companies with more than A$1 million in assets which "would be contrary to the national interest." Canada, which used to have one of the most liberal foreign investment policies in the world, has recently enacted a Foreign Investment Review Act, under which foreigners must apply to the Foreign Investment Review Agency before acquiring control of a Canadian business or establishing an unrelated new business in Canada. France has an extensive system of prior authorization by the Ministry of Finance for substantial foreign investment. Japan, although presently easing its formerly restrictive attitude towards all foreign investment, still sets percentage ceilings on the amount of foreign ownership of corporations in most Japanese industries. In Mexico, foreigners must obtain prior authorization for the acquisition of an aggregate of more than 25 percent of the capital stock or 49 percent of the fixed assets of any existing enterprises, whether acquired from foreign or Mexican interests. The Bank of England must consent before 10 percent or more of the shares in a United Kingdom company can be issued or transferred to a nonresident.

Most of the above foreign investment restrictions and prior authorization requirements of foreign countries are not aimed primarily at halting foreign portfolio investment but, rather, like the United States restrictions, have been enacted to prevent foreign control of domestic enterprises and industries.

Expropriation of Foreign Investment

The eight foreign countries analyzed in this study have had little experience with expropriation of foreign investment. After World War II, France nationalized certain industries, affecting the interests of foreign

shareholders, and Mexico has expropriated oil properties and land owned by foreign interests. However, the expropriation laws, if any, of these eight countries generally play insignificant roles in their economic affairs today. Foreign investment in these countries is basically treated equally with domestic investment for expropriation and nationalization purposes. Moreover, these nations, like all sovereign states, are subject to minimum standards of international law with respect to expropriation and confiscation.

The United States has a more comprehensive body of expropriation law than any of the eight foreign countries studied. United Kingdom law is also far reaching; however, its common law and statutory enactments dealing with control of foreign property are limited to trade with enemies during wartime. The main United States expropriation law, the Trading with the Enemy Act, may be applied during declared states of national emergency in peacetime as well as in wartime. Under United States law, compensation must be paid for all foreign property actually vested by the Government with the exception of property owned by alien enemies.

Many nations do not have any statutory enactments on the subject of expropriation or, if they do, have little case law in that area. The United Kingdom, as noted above, is one exception. Also, Mexico in the 1930's enacted an oil expropriation law which was followed thereafter by a decree expropriating the properties of seventeen foreign oil companies. A settlement of the oil companies' claims was eventually reached.

Sovereign countries are, of course, free to enact foreign expropriation laws at any time which could result in the swift expropriation of foreign properties. If such expropriations meet certain international standards including reasonable and timely compensation for such takings, international law would not be violated.

Expropriation does not appear to be an important concern of foreigners investing in the eight foreign countries studied. Nor is it considered an important concern by foreign investors in the United States, despite the fact that the United States has "frozen" Russian, Chinese and Cuban assets as a response to the seizure of American assets by those countries. In any event, such "frozen" assets are normally not confiscated in the usual sense of the term "expropriation"-at least not immediately-but are held pending negotiations with the nations involved concerning American assets seized by them.

Bank Secrecy

The banking laws of most countries require banks to keep customer affairs confidential. There is considerable variation, however, in the degree of confidentiality required and the ability of third parties to penetrate bank secrecy. At one end of the spectrum, Swiss federal banking law makes a breach of the secrecy obligation a criminal act punishable by a fine or imprisonment. In the United States, on the other hand, it is a crime not to keep records and make disclosures required by the Bank Secrecy Act of 1970. The bank secrecy laws of the other countries studied are somewhere between the positions taken by Switzerland and the United States.

Australia, Canada, and the United Kingdom are characteristic of the middle range. In those countries a bank is under a legal obligation to keep its customers' affairs secret. If the obligation is breached, the bank is liable for any damages suffered by the customer, but no criminal penalties attach. A number of well defined exceptions determine when the secrecy obligation is lifted. Banks must disclose information about customers when served with a subpoena or when required by law to give government investigators access to records. However, a bank may not answer to questions of a police officer or tax inspector on a "fishing expedition": such agents must have specific authority to examine customer records.

French bank secrecy laws are very similar to those of Australia, Canada and Great Britain; the only real difference being that violations of secrecy are criminal acts. The laws of West Germany closely resemble those of Switzerland.

The key variable among bank secrecy laws lies in the conditions under which third parties, especially government investigators, may penetrate bank secrecy. Bank secrecy is not absolute in any country: banks are required to give evidence in civil and criminal proceedings even in Switzerland. The power of administrative agencies to gain access to customers' records differs significantly, however. In Switzerland tax authorities may not require a bank to reveal any information about a taxpayer's financial affairs. Income tax legislation in the United Kingdom requires banks to report certain information to tax authorities or disclose records under certain circumstances, but investigators do not have the power to examine records at will. French tax authorities have power to require disclosure of customer records when making audits. In Canada tax inspectors have blanket authority to require production of information and records from any person. German securities law investigators are able to penetrate bank secrecy in certain situations.

Powers of foreign government investigators to penetrate a country's bank secrecy laws generally parallel the authority of equivalent domestic investigators to obtain access to records under the same circumstances. Since Swiss tax authorities ordinarily cannot require disclosure of bank records from Swiss banks, neither can tax investigators from other countries. If a foreign investigation concerns a matter which would be a crime in Switzerland, the Swiss authorities are normally granted access to Swiss bank records, and the same privileges are granted to foreign investigators. In other countries, such as Canada, administrative agencies have much greater power to examine bank records, so access by foreign investigators is correspondingly enhanced.

Exchange Controls

Some of the eight foreign countries studied follow the U.S. policy of imposing no substantive restrictions on the international movement of funds. Others, however, do impose restrictions on, or require permission for, certain types of exchange transactions, often with a view to restricting the ability of their own nationals or residents

to take funds out of the country. None of the countries studied, however, places significant restrictions on the repatriation of income and capital by nonresident foreign portfolio investors.

The United States has a very nonrestrictive foreign exchange policy, compared with the eight foreign countries studied. As a recent guide for doing business in the United States pointed out,

In general, the United States places no restrictions on investment by nonresidents, or on repatriation by nonresidents of invested capital and profits derived therefrom. Some states condition the en

try of foreign corporations upon fulfillment of certain requirements, but such requirements are purely formal in

nature.

Unlike Australia, France, and Japan, the United States does not require exchange control approval by financial authorities for remittance of dividends, profits, interest, or royalties, or repatriation of capital. Nor are foreigners investing in the United States subject to substantive exchange control restrictions like those imposed by Japan, Switzerland, and the United Kingdom. In Canada, Germany and Mexico, however, foreign investors find an absence of foreign exchange restrictions comparable to that found in the United States.

Section 6(8) of P.L. 93-479 directs the Secretary to "compare the foreign portfolio investment activities in the United States with information available on the portfolio investment activities of American investors abroad."

This comparison is based upon data already available on U.S. portfolio investment abroad. The Act clearly does not contemplate a new benchmark survey of U.S. portfolio investment abroad, nor would such a survey have been feasible within the time allowed.

A significant amount of data on U.S. portfolio investment abroad is available. Estimates of U.S. holdings of foreign securities are included in statistics published annually by the Department of Commerce on the international investment position of the United States. In addition, the Treasury Department publishes monthly data on U.S. transactions involving foreign securities, including information on U.S. purchases of foreign stocks and foreign bonds. The Commerce Department publishes quarterly breakdowns of these Treasury series, classifying them as to new issues, outstanding issues and redemptions. Finally, some information on institutional aspects of U.S. portfolio investment abroad was developed by R. Shriver Associates in the course of their study.

The Available Data

The Commerce Department's annual estimates of long-term foreign portfolio assets held by U.S. residents are based essentially on data collected by the Treasury Department on its foreign exchange forms and published in the Treasury Bulletin; since these data are collected in the same manner as the data on foreign portfolio investments in the United States (see Chapter 7), they are subject to the same limitations. The Commerce estimates of foreign securities held by U.S. residents derive from benchmark data collected in a 1943 Treasury census of U.S. assets abroad. These data have been adjusted for subsequent net purchases or sales of foreign securities and roughly for changes in market values. In addition, that portion of foreign securities represented by foreigndenominated issues (mainly equities) has been roughly adjusted, from time to time, as exchange rates of the countries of issue fluctuated against the dollar. However, in view of the fact that very little information is available on the investment position with individual countries, and information on the currency of issue of

foreign stocks is incomplete, these adjustments are probably subject to considerable error.

Data on long-term foreign claims of U.S. banks and U.S. nonbanking concerns are collected monthly and quarterly respectively by the Treasury Department; since these are recorded at face value, there has been no need to adjust for price changes.

As a result of the collection and estimation techniques which have to be used, the published Treasury and Commerce data are subject to certain omissions. For example, foreign securities purchased by U.S. residents directly from foreigners (without going through a U.S. intermediary who reports to the Treasury Department) would be omitted from the Treasury data. However, such direct acquisitions probably are minimized by various difficulties which U.S. residents encounter in purchasing foreign securities without the help of a U.S. intermediary.

In addition, the published investment position data may contain substantial valuation errors for U.S. holdings of foreign securities; such valuation errors occur as a result of having insufficient detail on what foreign securities are held. However, this type of error probably is proportionately smaller for estimates of U.S. holdings of foreign securities than for estimates of foreign holdings of U.S. securities, because of the larger proportion of bonds in U.S. holdings. Also, since most of the foreign bond holdings of U.S. residents are dollar denominated issues which were originally privately placed or publicly offered in the United States, there are some current market prices available for these issues, thus reducing the possibility of valuation errors.

Another problem posed by the published data is the difficulty of determining the countries where U.S. portfolio investment has taken place. Purchases and sales of foreign securities by U.S. residents are recorded by the country of residence of the seller or buyer of these securities, and not by the country which is the issuer of the securities. If, for example, a U.S. investor acquires securities issued by a Canadian firm but held by the previous owner through a Swiss nominee, the records will show purchases of foreign securities from a Swiss holder.

Despite such limitations, the available data are adequate to permit a broad comparison of U.S. portfolio investment abroad with foreign portfolio investment in the United States; this is done in Table 18.

These data show that private foreign portfolio holdings in the United States approximately equal private

U.S.net purchases of foreign securities and foreign net purchases of U.S. securities over the past 10 years are summarized in Table 19. The data indicate that practically all of the increase in U.S. holdings of foreign securities in the last decade can be attributed to U.S. purchases of foreign bonds. U.S. residents purchased (net) less than $200 million worth of foreign stocks between 1966 and 1975.

A geographic breakdown of U.S. holdings of foreign securities in 1974 is given in Table 20. The figures indicate that Canadian issues accounted for more than three-fifths of all foreign securities owned by U.S. residents. In addition, U.S. residents held sizeable amounts of European, Israeli, Mexican, Japanese, and international organization issues.

This geographic breakdown was heavily influenced by the imposition of the Interest Equalization Tax (IET) on U.S. purchases of foreign securities. This tax, in effect for over 10 years, from mid-1963 until January 1974, was directed at U.S. purchases of "developed country"

1 The Interest Equalization Tax Act was designed to equalize the costs of longer term financing in the United States and in markets abroad by imposing an excise tax on acquisitions of certain foreign securities by U.S. persons. The Act provided a rate schedule ranging between 1.05 percent and 15 percent for debt, depending upon the maturity, and a flat 15 percent rate for stock. It also permitted these rates to be modified by Executive Order consistent with the balance-ofpayments objectives of the United States subject to a maximum rate of 22.5 percent for both stock and debt. The tax rate was reduced to zero by Executive Order for trades and acquisitions made after January 29,

1974, and the Act expired on June 30, 1974. The statutory rates were modified by other Executive Orders as follows: Between December 31, 1973, and January 29, 1974, debt obligations were subject to rates ranging between 0.26 percent and 3.75 percent while stock acquisitions were subject to a 3.75 percent rate. Between April 3, 1969, and January 1, 1974, the rates were 0.79 percent to 11.25 percent for debt obligations and 11.25 percent for stock. Between August 29, 1967, and April 4, 1969, the rates were 1.31 percent to 18.75 percent for debt and 18.75 percent for stock acquisitions.