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FEDERAL

RESERVE

BA|N K

O F DALLAS

Dallas, Texas 75222
Circular No. 67-1^2
July 19, 1967

To All Reserve City Banks
in the Eleventh Federal Reserve District:

Enclosed is a copy of the Supplementary Statement of the
Under Secretary of the Treasury given before the Senate Finance
Committee July 1^, 19^7*

You will note that the suggested new

procedure outlined in this statement provides that Reserve City
member banks will become participating custodians authorized to
issue validating certificates for the transfer of foreign securities
between U. S. citizens.
According to our information as of this date, the suggested
rules and regulations in Attachment A to the Under Secretary’s
statement have not yet been given Congressional approval, but the
Under Secretary proposed that they became effective July 15, 19^T>
pending such approval.
As additional information on this matter becomes available
to u js, we will forward it promptly.
Very truly yours,
WATROUS H. IRONS
President

Enclosure

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

(FOR RELEASE AT 10:15 A.M., JULY 14, 1967)
SUPPLEMENTARY STATEMENT OF THE HONORABLE FREDERICK L. DEMING
UNDER SECRETARY OF THE TREASURY
ON H.R. 6098 BEFORE THE
SENATE FINANCE COMMITTEE
JULY 14, 1967

I would like now to discuss with you the Interest Equalizaon xclJ. cvc LSjlodl pTODi.em.
*
As you know, the IET does not apply to purchases of foreign
securities by Americans from American sellers.

We have found

that tax evaders are selling foreign securities in the United
States with false representation as to American ownership.
The evidence does not indicate widespread individual noncompliance with IET laws but rather that a limited number of
unscrupulous persons have operated to evade the IET.

Indications

are that the fraud became sizeable toward the end of 1966,
perhaps stepping up in the first part of 1967, and probably
substantially cut back by the end of last month as a result oi
our investigations.

The Internal Revenue Service investigations

of evasions over the past six months have identified, on a
projected annual basis, illegal security transactions in the
order of $100 million to $150 million.

If left unchecked,

the amounts involved in evasions could go considerably higher.
We are concerned by any evasion and I want to describe in some
detail both the manner in which evasion has been taking place
and our proposals for stopping it.

-

2

-

Since the law went into effect, the Internal Revenue Service
has conducted an educational campaign about its requirements,
primarily for the benefit of security brokers.

Delinquency

checks were initiated to determine whether the tax was being
paid on taxable purchases.

Reports of alleged fraudulent

transactions have been investigated.

A special Grand Jury

established in the Southern Judicial District of New York has
returned indictments against six individuals and one corporation.
The cases are awaiting trial for IET offenses and are scheduled
for hearings in September.
Although considerable publicity has resulted from these
legal actions, they have not achieved the degree of deterrence
hoped for at the time of the establishment of the Grand Jury.
This spring, the

Securities & Exchange Commission provided the

Internal Revenue Service with information obtained from a fcttidy of
foreign securities trading which indicated that IET violations were
taking place, possibly on a substantial scale.
For example, there appeared to be a large volume of trans­
actions in which foreign-owned foreign stocks were channeled
through foreign broker-dealers into the United States as if they
were American-owned foreign stocks.

In many cases, the certifi­

cate of American ownership, which was arranged to accompany the

- 3 stock, was signed by an American citizen of unsubstantial means,
residing outside of this country.

These certificates were false.

In some cases, documentation was arranged to make the American
signing the certificate appear as the bona fide owner and seller
of the stock.

In some other cases, the American simply signed a

certificate of American ownership in blank in exchange for a
"fee" which sometimes amounted to $10 per certificate*
The foreign broker-dealer would generally sell the foreign
stocks, accompanied by the false certificates, to a small
American over-the-counter broker-dealer.

Typically, this dealer,

in turn, would then re-sell the stock in the United States to
larger broker-dealers specializing in foreign securities, con­
firming to them that the stock was American-owned.

In the case

of over-the-counter trading, a written confirmation received
from a member of the National Association of Security Dealers *
an association

covering almost all American broker-dealers,

is accepted as conclusive proof of prior American ownership,
unless the confirmation is qualified, or unless the person making
the acquisition has actual knowledge that the confirmation is
false in any material respect.

The larger broker-dealers

presumably rely on this "clean confirmation" procedure, as it is
called.

In some cases, involving substantial volumes of stock,

the foreign broker-dealers would sell directly to large American

- 4 broker-dealers, some of whom are members of the major national
securities exchanges.
These transactions appear to have been concentrated in
foreign stocks with special appeal.

The prices of these stocks

abroad are generally several points or more below the price of
the same shares when they are sold by one American to another on
a tax-free basis.

This spread of several points furnishes the

profit resulting from these tax-evading transactions.
I come now to the possible solutions.

At one end of the

\
range of alternatives would be application of the Interest
Equalization Tax to transactions in foreign stocks between
Americans, as well as to the purchase of such stocks by an
American from a foreigner.

To take this action would mean

penalizing many legitimate transactions which do not hurt our
balance of payments, in order to catch those fraudulent trans­
actions which do hurt our balance of payments.

This does not

seem an appropriate solution.
At the other end of the range of alternatives would be an
amendment of the IET law to exempt from the tax the purchase
of outstanding foreign stocks from foreigners*
suggested when the IET was first considered.

This was
The suggestion

was discarded at that time, and I think properly so.
reasons are as follows.

The

- 5 Failure to tax outstanding equities at the same rate as
new issues would lead to their substitution for the new issues
as a means of raising capital in the U. S*

No one can distin*

guish new shares of stock from old once they are issued, and
a sizable potential would be opened for the movement of Ameri­
can funds to Europe through secondary distribution of unissued
stock, or stock assembled for sale from a group of foreign stock­
holders .
These techniques are well known.

It would not be much

of a problem for a potential European borrower to exchange
new stock for outstanding blocs of foreign stock in his own
s to c k h o l d e r ^ hand and then offer the latter to American customers
as a means of raising funds tax free in the U. S.

American-

owned foreign companies could be formed to do the same thing*
On the demand side, American investors have in the past
and may again, in the absence of a tax on purchases of outstaning foreign stocks, become heavy buyers of such stocks with
consequent adverse effect

on our balance of payments.

We simply

cannot afford a weakening of this important legislation during
this period of substantial balance-of-payments deficits.
Instead of either of the extreme solutions mentioned above,
we are proposing one aimed, essentially, at eliminating the
possibility of tax-free transactions among Americans in foreign
securities based on false American certificates of ownership.

- 6 -

The Treasury recommends the establishment, effective
Saturday, July 15, 1967, of a new system with respect to
transactions between American buyers and sellers of foreign
securities.

The new system is designed to prevent evasion

of the Interest Equalization Tax,
In the past, sellers of foreign securities to American
buyers could exempt the purchaser from payment of the
Interest Equalization Tax by assertion, on their part, of
U. S. citizenship and ownership of the securities in
question.

Proof of American ownership was evidenced by an

American ownership certificate signed by the seller.
Under the new system, the seller must, in addition
to establishing his U. S. citizenship and ownership« estab­
lish that he obtained the securities "validly."
The seller can satisfy this requirement in the following
manner:
1.

He can obtain a "validation” from an eligible

broker-dealer.
2.

He can obtain a "validation" from an eligible bank*

3.

He can obtain a "validation" from the Internal

Revenue Service.

The effect of the new requirements is to replace a
system under which certificates of American ownership signed
by any U.S. person exempted the buyer from payment of the
tax with a new system under which certificates issued by a
limited number of institutions and the Internal Revenue Service
are required to provide the buyer with this exemption.
To insure compliance at the "eligible" broker-dealer and
bank level new reporting and record keeping requirements are
being established, involving segregation of transactions in
foreign securities from transactions in domestic securities.
To effect the transfer to the new system, the list of
eligible broker-dealers will initially encompass all members
of the New York Stock Exchange, the American Stock Exchange,
and those members of the National Association of Security
Dealers with net worth of over $750,000 or who engaged in 300
or more transactions in foreign securities either during the
week beginning July 2, 1967, or the week beginning July 9, 1967.
The list of these firms will be set forth in the Federal
Register and in Attachment A.
The list of eligible b anks will initially encompass
Federal Reserve member banks classified as reserve city banks.

- 8 Additional firms and banks will be added to these lists
on appropriate indications that they will meet the reporting
and record-keeping requirements.
Eligible broker-dealers and banks may validate foreign
securities held in their custody for American owners as of
July 14, 1967.

The Internal Revenue Service will establish

by Monday, July 17, 1967, validation procedures with respect to
other foreign securities.
The new procedures, described in detail in Attachment A,
have been prepared in consultation with industry experts in
order to minimize technical problems when trading commences
on the basis of these new rules on July 17, 1967.

In addition,

we are making special efforts to disseminate information on
the new procedures as quickly and broadly as possible; material
is being distributed to the financial community at this moment,
giving all the necessary information.
I urge upon this Committee the necessary legislative action
on the amendments which will make these new procedures effective
so that this evasion ends.

Attachment A

DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
RECOMMENDED AMENDMENTS TO THE PROPOSED
INTEREST EQUALIZATION TAX EXTENSION ACT OF 1967

Exemption for Prior American Ownership; Due Date of Interest Equalization
Tax

On

July l i 1967 the Treasury Department recommended that the
l,

Senate act favorably on H. R. 6098, 90th Congress, 1st Session (the
proposed Interest Equalization Tax Extension Act of 1967) as passed
by the House of Representatives but with amendments, effective with
respect to acquisitions of stock or debt obligations made after
July 1U, 1967, which would:
(a)

Replace the exemption for prior American ownership with

an exemption for "prior American ownership and compliance".

The new

exemption would apply to the acquisition of stock or a debt obligation
of a foreign issuer or obligor if it is established that the person
from whom such stock or debt obligation was acquired (the "seller")
(i) was a United States person throughout the period of his
ownership or continuously since July 18, 1963, (ii) had not acquired
such stock or debt obligation under an exeaaption which made him
ineligible to sell such stock or debt obligation as a United States
person, and (iii) had complied with his interest equalization tax
obligations with respect to such stock or debt obligation (i.e.,
the seller acquired such stock or debt obligation in an acquisition

- 2 which was not subject to the interest equalization tax or the seller
paid the tax).
(b)

Provide that if stock of a foreign issuer or a debt

obligation of a foreign issuer or obligor was acquired by a United
States person in a transaction subject to the interest equalization
tax, the United States person is required to file an Interest
Equalization Transaction Tax Return accompanied by proper payment
prior to any disposition of the stock or debt obligation if the
acquisition had not been reported on the appropriate Interest
Equalization Quarterly Tax Return accompanied by proper payment.
(c)

Specify the manner, described below, under which the

exemption for prior American ownership and compliance can be
established.
(d)

Amend the provisions with respect to "regular market"

trading on certain national securities exchanges and Hclean com­
parison” trading in the over-the-counter market set forth in section
4918 of the Internal Revenue Code so that they are applicable only
to those members and member organizations of national securities
exchanges or national securities associations registered with the
Securities and Exchange Commission, which have agreed to comply, and
do comply, with the amended statutory provisions and with the docu­
mentation, record-keeping and reporting requirements established
by the Secretary or his delegate (referred to in this Notice as
"Participating Plrmsw).

During the period beginning July l£, 1967

-

3 -

and until a notice or notices to the contrary are published t r the
g
Internal Revenue Service, it will be presumed that (i) all members
or member organizations of the New Tork Stock Exchange, (ii) all
members and member organizations of the American Stock Exchange,
and (iii) those members or member organizations of the National
Association of Securities Dealers, Inc., which either reported a
net capital (as defined in Rule lf>c3-l under the Securities Exchange
Act of 193U) of $7^0,000 in the latest financial statement filed with
the Securities and Exchange Commission on fbrm X-17A-J? prior to
July 13* 1967, or which have effected 300 or more transactions
in foreign securities during either the week commencing July 2 or
commencing July

9 1967
,

(which members or member organizations of

the National Association of Securities Dealers, Inc., are listed below)
have agreed to comply, and are complying, with such amended statutory
provisions and with the documentation, record-keeping

and reporting

requirements and shall be Participating Firms.
Participating firms As Of July lf>, 1967
The Participating firms as of July 1 > 1967,
5,

are asfollows*

All members and member organizations of the New York Stock
Exchange.
All members and member organizations of the American Stock
Exchange.
The following members and member organizations of the National
Association of Securities Dealers, Inc., not members or member

- u organizations of the New York Stock Exchange or the American Stock
Exchange:
1.

A. E. Ames Co., Inc., New York, New York

2.

Allen & Co., New York, New York

3.

Allison-WHliams Company, Minneapolis, Minn,

i. 5* C. Ziegler & Co., West Bend, Wise.
i
£.

Bankers Securities Corp., Philadelphia, Pa.

6. Barrow, Leary & Co., Shreveport, La.
7.

Calvin, Bullock Ltd., New York, New York

8.

Carl Marks

9.

Cartwright, Valleau & Company, Chicago, 111.

f Co.,
t

i Co.,
t

Inc., New York, New York

10.

Childress

Jacksonville, Fla.

11.

City Securities Corp., Indianapolis, Ind.

12.

Collett & Co., Inc., Indianapolis, Ind.

13*

Cumberland Securities Corp., Nashville, Tenn*

1*
1.

Dayton Bond Corp., Dayton, Ohio

1

Dempsey & Co., Chicago, HI.

16.

Distributors Group, Inc., New York, New York

17.

Donald B. Litchard, Boston, Mass.

18.

Dreyfus Corp., New York, New York

19. E. L. Villareal Co., Inc., Little Rock, Ark.
20. E* M. Warburg & Co., Inc., New York, New

York

21. Eaton & Howard, Inc., Boston, Mass.
22.

Equitable Securities Corp., Nashville, Tenn.

23*

Excelsior Option Corp., Boston, Mass.

- 5 2*
1.

F. Eberstadt & Co., New York, New York

2>
5.

F. I. duPont, A. C. Allyn, Inc., New York, New York

26.

First Boston Corp., New York, New York

27.

First Investors Corp. of New York, NewYork, New

28.

First Southwest Co., Dallas, Tex.

29.

Glover & MacGregor Inc., Pittsburgh, Pa.

30.

Gordon B. Hanlon & Co., Boston, Mass.

31.

Gross & Co., Los Angeles, Calif.

32.

H. S. Kipnis & Co., Chicago, 111.

33.

Halsqy, Stuart S Co., Inc., Chicago, 111.
t

3U.

Hamilton Management Corp., Denver, Colo.

35. Henry Spiegel, New York, New York
36. Hettleman & Co., New York, New York
37. Hickey & Co., Chicago, 111.
38. Hirsch

& Co.,

Inc., New York, New

York

39.

IDS Securities Corp., Minneapolis, Minn.

iO
i.

Insurance Securities Inc., Corp., Houston, Tex.

la.

J. C. Bradford & Co., Inc., Nashville, Tenn.

h,
2

J. S. Strauss & Co., San Francisco, Calif.

U3* John Nuveen & Co., Inc., Chicago,
Uu

111.

John W. Clarke & Co., Chicago, 111.

U5. Kalman & Co., Inc., St. Paul, Minn.
16
*.

Kenower, MacArthur & Co., Detroit, Mich.

1 7 Loomis, Sayles & Co., Inc., Boston,
*.

Mass.

U8. M. A. Schapiro & Co., New York, New

York

York

- 6 U9.

National Securities & Research Corp., New York, New York

50.

National Variable Annuity Co. Fla., Jacksonville! Ha.

51.

Parsons & Co., Inc., Cleveland, Ohio

52.

Paul Revere Variable Annuity Ins. Co., Worcester, Mass.

53.

Pflueger & Baerwald, San Francisco, Calif.

5U.

R. S. Dickson & Co., Inc., Charlotte, N. C.

55.

Richard W. dark Corp., New Tork, New York

56.

Second District Securities Co., Inc., New York, New York

57*

Stephens, Inc., Little Rock, Ark.

53.

Stem Brothers & Co,, Kansas City, Mo.

59.

Stetson Securities Corp., Fairfield, Conn.

60.

Stone & Youngberg, San Francisco, Calif.

61.

Stryker & Brown, New York, New York

62.

The Crostyr Corp., Boston, Mass.

63. Thomas, Haab & Botts, New York, New York
6*
1.

Thomas McDonald & Co., Chicago, 111.

65.

Troster, Singer & Co., New York, New York

66.

Vance, Sanders & Co., Inc., Boston, Mass.

67.

Waddell & Reed, Inc., Kansas City, Mo.

68.

Weedon & Co., San Francisco, Calif.

69.

Wellington Management Co., Philadelphia, Pa.

70.

Wheeler, Hunger & Co., Los Angeles, Calif.

71.

White Weld i Co., New York, New York
t

72.

William C. McDonnell, New York, New York

73.

William E. Pollack & Co., Inc., New York, New York

71u

Wood Struthers & Co., Inc., New York, New York

Changes In List Of Participating Firms
Any other member or member organization of a national securities
exchange or a national securities association registered with the
Securities and Exchange Commission may become a Participating Firs
if it files with the Contnissioner of Internal Revenue, Washington, D. C.

2022k

(Attentions CP) a letter signed by the member, a partner or an

officer (i) requesting designation as a Participating Firm, (ii) agreeing
to comply with the documentation, record-keeping and reporting require­
ments established by the Internal Revenue Service (whether estab­
lished prior or subsequent to the date of the letter), (iii) agreeing
that its books and records no matter where located may be examined
by any employee of the Internal Revenue Service, and (iv) if the
letter is filed with the Commissioner of Internal Revenue on or after
August 1f , 1967 stating that such documentation, record-keeping and
>
reporting requirement ;>r*ocedures are operational.

The Internal

Revenue Service will from time to time publish the names of those
members or member organizations which have become Participating
Firms subsequent to July 1$, 1967.
Any member or member organization which became a Participating
Firm prior to August l£, 1967 shall cease to be a Participating
Firm unless on or before August 1 1 9 6 7 it files with the Commissioner
of Internal Revenue a letter signed by the member, a partner, or an
officer setting forth each of the itens (i) to (iv), inclusive, of
the preceding paragraph.

A Participating Firm may terminate its

-

8

-

status as such by filing a request with the Commissioner of Internal
Revenue.

In addition, if the Commissioner of Internal Revenue has

reasonable cause to believe that a Participating Firm is not com­
plying with ouch statutory provisions, or with the documentation,
record-keeping and reporting requirements, or any part thereof,
he may cause the removal of such firm from the list of Participating
Firms.
The effective date on which a member or member organization
shall become or cease to be a Participating Finn shall be the date
specified in a notice issued by the Internal Revenue Service, which
date shall not be prior to the date following the date on which the
notice was made available to financial publications and wire services.
Establishment Of Exemption Fbr Prior American Ownership and Compliance
The Treasury recommended that the amendments to H. R. 6098
authorize the following procedures, effective July l > 1967, for the
f,
establishment of the exemption for prior American ownership and com­
pliances
1.

If a United States person acquiring stock of a foreign

issuer or a debt obligation of a foreign obligor directly from
or through a Participating Firm receives in good faith from the
Participating Firm an fIET Clean Confirmation" (meeting the
t
requirements described below) applicable to the particular
stock or debt obligation acquired, the exemption for prior
American ownership and compliance shall be deemed to have
been established.

- 9 2.

If a United States person acquiring stock

of a foreign issuer or a debt obligation of a
foreign obligor receives in good faith copies 1
and 2 of a Validation Certificate issued by the
Internal Revenue Service to the seller or to
himself applicable to the particular stock or debt
obligation acquired and^ in the case where the
Validation Certificate was issued to the seller,
completes and files copy 2 of the certificate with
the Internal Revenue Service, the exemption for
prior American ownership and compliance shall be
deemed to have been established.
3.

If a United States person acquiring stock

of a foreign issuer or a debt obligation of a
foreign obligor establishes that there is reason­
able cause for an inability to establish prior
American ownership and compliance in accordance
with one of the foregoing, prior American owner­
ship and compliance may be established by other
evidence which satisfies the Internal Revenue
Service that the person from whom such acquisi­
tion was made was a complying United States person
not ineligible to sell as a United States person.

-

10

-

Sales Effected by Participating Firms
The Treasury further recommended that the amendments
to H. R. 6098 provide that Participating Firms are required
to sell stock of a foreign issuer or a debt obligation of a
foreign obligor as stock or a debt obligation not exempt
from the interest equalization tax by reason of the exemp­
tion for prior American ownership and compliance except in
the following cases:
1.

The Participating Firm (i) held in its

custody at the close of business on July 14,
1967 for the account of the seller the stock or
debt obligation being sold,

(ii) has in its

possession and relies in good faith on a
cettificate of American ownership with respect
to the stock or debt obligation being sold, or
a blanket certificate of American ownership with
respect to such account, and (iii) included the
stock or debt obligation in the Transition In­
ventory of the Participating Firm duly filed with
the Internal Revenue Service as hereinafter
provided.

»

-

2.

11

-

The Participating Firm purchased on or

after July 15, 1967 for, or sold to, the seller
the stock or debt obligation being sold if the
exemption for prior American ownership and com­
pliance applied to the seller*s acquisition and
if the Participating Firm continuously held in
its custody such stock or debt obligation or re­
ceived from the seller the identical stock
certificates or evidence of indebtedness which
it had previously delivered to the seller in
respect of the purchase.
3.

The Participating Firm received the

stock or debt obligation being sold from another
Participating Firm or from a Participating
Custodian with a Transfer of Custody Certificate
meeting the requirements described below.
4.

The Participating Firm has received from

the seller copies 1 and 2 of a Validation
Certificate issued by the Internal Revenue Service
applicable to the stock or debt obligation being
sold and on the date of the sale or the next
business day completes and files copy 2 of the
certificate with the Internal Revenue Service*

-

5.

12

-

The Participating Firm withholds the amount

of Interest Equalization Tax which would be imposed
had the seller purchased in a taxable acquisition
the stock or debt obligation being sold on the day
of the sale.

Information on withholding procedures

will be published shortly.

IET Clean Confirmation
A Participating Firm is authorized to issue an 1 IET
1
Clean Confirmation" to a customer with respect to stock or
a debt obligation of a foreign issuer or obligor in the
following circumstances:
1.

In a cas^ wV.oro the Participating Firm

purchased tne stocl; or debt obligation as broker
for the customer from or through another Participat­
ing Firm in the regular market (in the case of a
purchase on a national securities exchange referred
to in Section 4918(c) of the Internal Revenue Code)
or received a clean comparison from another
Participating Firm under the procedures referred
to in Section 4918(d) of the Internal Revenue Code.
2.

It sold the stock or debt obligation as

dealer to the customer and it was a complying
United States person not ineligible to sell as a
United States person.

- 13 Each IET Clean Confirmation shall state the date of
acquisition, the number of shares or the face amount of
obligations purchased, the description of the stock or debt
obligations, the price paid and the name of the broker
representing the seller and the market on or through which
the purchase was effected.

Only an original document may

constitute an IET Clean Confirmation and each copy or
duplicate shall be marked as such.

All other confirmations

issued by Participating Firms with respect to stock or debt
obligations of foreign issuers or obligors shall be clearly
and indelibly marked so as to be distinguishable from IET
Clean Confirmations.
Issuance of Validation Certificates
Validation Certificates will be issued by ali District
Directors of Internal Revenue commencing Monday, July 17,
1967, upon proof that the United States person on whose
behalf the Validation Certificate is requested has complied
with his interest equalization tax obligations with respect
to the securities to be covered by the Validation Certificate
The Internal Revenue Service will shortly announce the pro­
cedures for obtaining Validation Certificates.

Each District

Director will reissue Validation Certificates in different
denominations upon request.

- 14 Transition Inventory
The Transition Inventory shall be filed with the
Commissioner of Internal Revenue no later than August 1 5 ,
1967.

Each Participating Firm and each Participating

Custodian filing a Transition Inventory (Participating
Custodians are described below)

shall list those stocks and

debt obligations of foreign issuers and obligors held at the
close of business July 14, 1967, and shall indicate those
held for the accounts of United States persons and those
held for the accounts of other persons.
Participating Custodians
During the period beginning July 15, 1967 and until a
notice or notices to the contrary are published by the
Internal Revenue Service, the Participating Custodians are
the Federal Reserve Member Banks which are classified as
reserve

city banks.

A bank or trust company insured by the Federal Deposit
Insurance Corporation may become a Participating Custodian
if it files with the Commissioner of Internal Revenue,
Washington, D. C. 20224
an officer

(Attention:

CP) a letter signed by

(i) requesting designation as a Participating

I

- 15 Custodian,

(ii) agreeing to Comply with the documentation,

record-keeping and reporting requirements established by
the Internal Revenue Service (whether established prior or
subsequent to the date of the letter), (iii) agreeing that
its books and records no matter where located may be examined
by any employee of the Internal Revenue Service, and (iv) if
the letter is filed with the Commissioner of Internal
Revenue on or after August 15, 1967 stating that such docu­
mentation, record-keeping and reporting requirement pro­
cedures are operational.

The Internal Revenue Service will

from time to time publish the names of those members or
member organizations which have become Participating
Custodians subsequent to July 15, 1967.
Any bank or trust company which became a Participating
Custodian prior to August 15, 1967 shall cease to be a
Participating Custodian unless on or before August 15, 1967
it files with the Commissioner of Internal Revenue a letter
signed by an officer setting forth each of the items
(iv), inclusive, of the preceding paragraph.

(i) to

A Participating

Custodian may terminate its status as such by filing a
request with the Commissioner of Internal Revenue.

In addi­

tion, if the Commissioner of Internal Revenue has reasonable
cause to believe that a Participating Custodian is not com­
plying with the statutory provisions related to the interest

-

16 -

equalization tax applicable to it, or with the documentation
record-keeping and reporting requirements, or any part there
of, he may cause the removal of such firm from the list of
Participating Custodians.
The effective date on which a bank or trust company
shall become or cease to be a Participating Custodian shall
be the date specified in a notice issued by the Internal
Revenue Service, which date shall not be prior to the date
following the date on which the notice was made available
to financial publications and wire services.

Transfer of Custody Certificates
Transfer of Custody Certificates shall be issued only
by Participating Firms and Participating Custodians and only
in connection with a transfer from the account of a customer
of a Participating F±rm or Participating Custodian to the
account of the same customer vith a different Participating
Firm or Participating Custodian in the following circum­
stances :
1.

The Participating Firm or Participating

Custodian held in its custody on July 14, 1967 for
the account of the customer the stock or debt
obligation referred to in the Transfer of Custody
Certificate and acquired and holds in good faith
a certificate of American ownership with respect to

such stock or debt obligation or a blanket certif
cate of American ownership with respect to such
account, if it included such stock or debt obliga
tion in the Transition Inventory duly filed by it
with the Commissioner of Internal Revenue.
2.

The Participating Firm or Participating

Custodian received the stock or debt obligation
referred to in a Transfer of Custody Certificate
from another Participating Firm or Participating
Custodian accompanied by a Transfer of Custody
Certificate.
3.

The Participating Firm purchased for the

customer the stock or debt obligation referred to
in the Transfer of Custody Certificate and in
connection with the purchase either received
(i) a Validation Certificate issued by the
Internal Revenue Service, or (ii) was authorized
to issue an IET Clean Confirmation and in either
case continuously held in its custody the stock
or debt obligation so purchased or received back
from the purchaser the identical securities or
evidence of indebtedness previously delivered to
the purchaser.

- 18 Record Keeping Requirements
The record-keeping requirements for Participating Firms
are, until further notice, identical to the record-keeping
requirements for broker-dealers issued pursuant to the
Securities Exchange Act of 1934 with the following required
ittbdifications:
1.

Records of original entry (in most cases

the purchase and sale blotter)

shall be prepared

and maintained separately for all purchases and
sales of stock and debt obligations of foreign
issuers and obligors.

All entries shall clearly

designate those transactions which involved
foreign-owned securities.

All entries reflecting

a purchase of securities, the acquisition of which
is exempt from the tax under the exemption for
prior American ownership and compliance, shall
clearly designate the documentation received es­
tablishing such exemption.

All entries reflecting

a sale of securities regular way on a national
securities exchange referred to in Section 4918(c)
of the Internal Revenue Code or under the clean
comparison procedure established by Section 4918(d)
of the Code shall clearly designate the documenta­
tion authorizing such sale.

- 19 2.

The securities record or ledger reflecting

separately for each stock or debt obligation of a
foreign issuer or obligor all "long" or "short"
positions

(including such securities in safekeeping)

carried by such firm or custodian for its account or
for the account of customers
record sheets)

(commonly known as stock

shall be prepared and maintained apart

from those prepared and maintained for all other
securities.

All entries in such record or ledger,

and in each customer*s account, shall clearly
designate those of such securities with respect to
which the firm or custodian can issue a Transfer of
Custody Certificate without obtaining further
documentation.
3.

The ledger account itemizing separately the

accounts of such firm or custodian
purchases,

reflecting all

sales, receipts, and deliveries of stock

or debt obligations of a foreign issuer or obligor
for the firm's own investment and trading accounts
shall be prepared and maintained apart from those
prepared and maintained for all other securities.
All entries shall clearly designate those transactions
which involve securities on which the firm or
custodian can issue a Transfer of Custody Certificate.

- 20 Appropriate files for each of said dealer-owned
foreign securities shall be maintained,

in readily

accessible form, to hold all relevant information
and evidence to substantiate tax free nature of the
acquisitions pursuant to which such securities were
acquired or, if acquired in a taxable transaction,
the retained copies of the tax returns filed with
respect to such acquisitions.
4.

Separate files shall be maintained for all

interest equalization tax reports filed with the
Internal Revenue Service

(both for information

and tax paying purposes)

including copies of all

documents filed with the Internal Revenue Service
and summaries and supporting schedules.

In addi­

tion, such files shall contain substantiation of
the Transition Inventory filed with the Commissioner
of Internal Revenue.

Cettain Debt Obligations
The foregoing procedures would not apply to those debt
obligations of foreign obligors which are neither convertible
nor listed or traded in domestic or foreign markets.

In such

cases, the exemption for prior American ownership and com­
pliance will, until other procedures are announced, be

-

- 21 established if the United States person acquiring the
obligation receives in good faith a letter from the seller
certifying to the exemption together with a copy thereof
and files the copy with the Internal Revenue Service.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102