conducted internal investigations. Such voluntary disclosure, however, does not immunize a company against Commission enforcement action, although, in many cases, it may lessen the need for such proceedings. This voluntary procedure supplemented the Commission's enforcement resources and, with companies participating in the program permitting our staff access to their records, it has proven quite effective.

In the process, the Commission also found it appropriate to institute over 30 injunctive actions, which not only resulted in the imposition of injunctions against the offending companies and many of their officers and directors, but also resulted in the imposition of ancillary remedies, including, among other things, the selection of new, and independent, boards of directors, the imposition of new corporate procedures and, in many cases, the appointment of special counsel to investigate the extent of prior improper corporate practices.

Both the Commission's voluntary disclosure program and the Commission's enforcement activities have involved companies engaged in ocean shipping activities. For example, the Commission recently bought a civil injunctive action against United States Lines, Inc., alleging various violations of the antifraud provisions of the securities laws in connection with the making of substantial improper and illegal payments totalling in excess of two and one half million dollars, most of which involved illegal rebates to shippers, together with fictitious entries in corporate books and the maintenance of certain funds off the company's books. In another case, the Commission filed suit against Gamble-Skogmo, Inc. and certain other named defendants in connection with the illegal receipt of rebate payments made to one of its subsidiaries, Gamble Imports Corporation. Both of these cases resulted in the imposition of civil injunctions prohibiting future violations of the federal securities laws. Similarly, several companies involved in shipping activities have voluntarily disclosed these kinds of activities.

The Commission's involvement with disclosures by ocean carriers and shippers of improper or illegal payments began in May, 1976, with the disclosure by R. J. Reynolds Industries that its ocean carrier subsidiary, Sea Land Services, had engaged in practices, including the payment of rebates, in violation of federal law. The company announced that it was commencing an investigation to uncover the details of these practices. The Commission's staff, at the same time, began informally to investigate both carriers and shippers.

In September of that year, R. J. Reynolds announced that its investigation was completed; it concluded that more than 19 million dollars in "possibly illegal" ocean rebates had been paid by Sea Land. No immunity from civil or criminal prosecution was promised to Reynolds, nor did the company seek such immunity.

Even before the release of Reynolds' disclosure in September, 1976, the Commission's staff commenced a series of inquiries of various publicly-held shippers and carriers, initially utilizing the information contained in Sea Land records, to determine the extent of rebates received from carriers, both domestic and foreign, and in particular the manner in which shippers had treated the receipt of such rebates on their books and records. Many shippers responded to the Commission's inquiries by coming forward with public disclosures. The process of investigation, both formal and informal, and the process of public disclosure, continues, and Commission enforcement actions involving shippers as well as carriers remain a distinct possibility.

As the foregoing discussion evidences, however, promises of immunity have not been necessary in order to promote public disclosure in this area, and the Commission's public files already contain a broad spectrum of information about the kinds of practices of this nature that have been employed in the shipping industry.

THE COMMISSION'S CONCERNS WITH H.R. 9518

In this context, the Commission is concerned about the effect Section 3 might have on its administration of the federal securities laws. Section 3 of the bill, as presently drafted, would not permit the criminal prosecution of individuals

1 Securities and Exchange Commission v. United States Lines, Inc., Civil Action No. 77-2746 (United States District Court for the Southern District of New York).

2 Securities and Exchange Commission v. Gamble-Skogmo, Inc., et al, Civil Action File No. 77 C 3426 (United States District Court for the Northern District of Illinois, Eastern Division).

for violations of United States laws, (including, by implication, the federal securities laws), where disclosure of the illegal payment activity was made to the Maritime Commission pursuant to the provisions of the bill and prior to the time that those individuals had actual notice that they were the subject of an investigation relating to the act disclosed.

Where potential violations of other United States laws are discovered in the course of Commission investigations, we refer the matter to the appropriate law enforcement agency for action. Section 3 of the bill would effectively prevent the pursuit of criminal investigations by other agencies resulting from information discovered by our staff, by removing the possibility of eventual prosecution in the area covered by the bill, including prosecutions by the Justice Department for violations of the federal securities laws.

While we recognize the concerns that prompted Section 3 of H.R. 9518, as drafted, this provision could effectively deny public investors and shareholders material corporate information. In this vein, it is important to note that claims of competitive disadvantage the factor apparently motivating Section 3 of H.R. 9518-have been voiced by many American companies engaged in a variety of occupations, and not just by carriers engaged in ocean shipping. But, improper rebates, kickbacks and bribes are unlawful, whether or not foreign companies also employ such tactics. The answer to the competitive problems raised is not, in our view, to reduce all companies to the lowest common denominator, but rather, is to utilize the legislative process, as H.R. 9518 otherwise seeks to do, to assert the full range of American jurisdiction to alleviate any competitive advantages foreign companies might otherwise obtain as a result of lax foreign legal standards. And, while this section of the bill purports to grant immunity only from criminal prosecutions, it is inherently ambiguous concerning its effect on civil injunctive actions. On balance, we do not believe that the important purposes of the bill would be lost if this immunity provision were deleted.

H.R. 9518 might also have the effect of implying that once disclosure is made to the Federal Maritime Commission under this bill, a corporation is relieved of its obligation to disclose the same information in public filings with the Commission. A case-by-case approach, preserving prosecutorial discretion within the overall objectives of the bill, would achieve the desired result without the adverse consequences resulting from immunity. This same result might also be achieved by providing for increased penalties after the first year rather than the present grace period.

In any event, even if some immunity provision is retained, the present one would make criminal prosecution difficult, even where warranted by H.R. 9518. Thus, the provision that actual notice of investigation have been received by would-be defendants would create serious evidentiary problems, likely vitiating the capacity of the government to prosecute criminally even in appropriate cases. Moreover, the "requirement" that actual notice be given to preclude immunity might prematurely prejudice the government's ultimate prosecution of a criminal case, including a prosecution against persons not entitled to rely on Section 3 of H.R. 9518. Finally, the express preservation of civil liability provided by Section 3(5) of the bill, for Maritime Commission agreements, creates an ambiguity concerning the Commission's capacity to continue to pursue violations of the federal securities laws by civil injunctive actions. At a minimum, therefore, we strongly urge that the bill make clear that the Commission may continue its important activities in the civil forum.

CONCLUSION

In summary, the Commission has been able to obtain adequate disclosure for investors and enforce the statutory provisions and rules prohibiting fraudulent or deceptive practices in connection with securities transactions in this important area. While we endorse the general thrust of H.R. 9518, we believe that the blanket criminal immunity that would be granted in this bill could adversely affect the Commission's ability to carry out its Congressional mandate.

I appreciate the opportunity to participate in these hearings and, of course, I shall be happy to respond to any questions the members of the Subcommittee might have.

Mr. ROSENBLAT. Our Commission's expertise stems from its responsibility under the Federal securities laws, to insure appropriate dis

closure by publicly held corporations. Because companies engaged in the shipping industry are often publicly held, the disclosure provisions of the Federal securities laws apply to those companies as well.

In administering the provisions of the Federal securities laws, as I will shortly discuss in more detail, the Commission has been aggressive in requiring publicly owned companies to disclose questionable or illegal payments.

Indeed, I might add-and I will describe to some extent what our program has been-it is that exposure which induced R. J. Reynolds to come forward and disclose Sea-Land's rebative practices. Despite the salutary goals that may have prompted the provisions of section 3 of the bill-establishing 1-year blanket immunity from criminal prosecution under Federal statutes, the Commission has serious. concerns that that provision may vitiate the effectiveness of its ongoing enforcement activities under the Federal securities laws.

Those activities, I might add, have proven to be quite effective in ferreting out questionable and illegal practices. Accordingly, while the Commission endorses the intent and substance of H.R. 9518, we strongly recommend the deletion of section 3 of the bill.

As the Chairman is aware, the disclosure provisions of the federal securities laws are designed to provide the shareholders of publicly held companies and the investing public with truthful and adequate financial and other material information which may be used as a basis for investing in the securities of such companies, or as a basis for corporate shareholders to exercise their voting rights in selecting corporate management, and making important corporate decisions.

The Commission also has authority and responsibility for enforcing statutory provisions, and adopting rules prohibiting fraudulent and deceptive practices in connection with these securities transactions.

In this context, the Commission has, for some time, been quite concerned with the problem of commercial and illegal corporate payments and practices. A basic discussion of our concerns was set forth in the report that our Commission submitted to the Senate Banking, Housing and Urban Affairs Committee on May 12, 1976, and which was published as a committee print.

In that report we noted that as a direct consequence of the Commission's vigorous enforcement of disclosure provisions, publiclyowned companies had disclosed illegal or corporate payments. A significant number of companies disclosed activities that involved socalled "foreign matters" and many of the matters disclosed appear to have constituted some form of commercial bribery.

Particularly disturbing was the high number of instances in which some members of corporate management were involved in, or had knowledge of, the activities reported, including the falsification or inadequate maintenance, of corporate records in an attempt to conceal questionable or illegal conduct.

Under the Federal securities laws, questionable or illegal payments that are significant in amount or, even if not significant in amount, that relate to a significant amount of business, are material to investors or shareholders, and must be disclosed. And, where these payments involve corporate officers acting without the knowledge of the

board of directors, suggesting the improper exercise of corporate authority, such occurrences are relevant to the quality of corporate management, and should be disclosed to the shareholders in proxy materials.

Even where payments of this nature are expressly approved by a company's board of directors, the resulting impact on the corporation may far exceed the immediate significance of the payment itself, or the business dependent upon it, as, for example, where such payments are effected off the books and records of the company, outside the normal channels of corporate accountability.

The existence of false books and records, of corporate slush funds, or other practices enabling certain directors or officers to utilize corporate funds without the normal checks of the corporate accountability system, is a matter requiring disclosure under the Federal securities laws.

Cognizant of the desirability of broad disclosures of this kind of corporate conduct, the Commission has encouraged publicly-held companies to make disclosures voluntarily, utilizing procedures traditionally open to any company facing a novel disclosure question. This procedure has resulted in more than 400 companies coming to the Commission staff, discussing the situation, and making appropriate discolsures in Commission filings. And, I might add, these are some of the largest companies in the world.

A significant number of these companies have conducted internal investigations, to go beyond the information they had already made publicly available. Such voluntary disclosure, however, does not immunize a company against Commission enforcement action, although the Commission, taking a pragmatic approach to the problem, has recognized that in many cases, a company's voluntary disclosure may lessen, or even in some cases, eliminate the need for enforcement proceedings.

This voluntary procedure is supplemented by the Commission's enforcement resources, and with companies participating in the programs, permitting our staff direct access to their records, has proven quite effective.

In the process, however, the Commission has also found it appropriate to institute over 30 injunctive actions-civil action in Federal courts-which not only resulted in the imposition of injunctions against the offending companies, and many of their officers and directors, barring them from repeating this kind of conduct, but perhaps more importantly, also has resulted in the imposition of ancillary equitable remedies.

Those remedies encompass, among other things, selection of new and independent boards of directors, the imposition of new corporate procedures, and in many cases the employment of special counsel to investigate the situation, and the extent of prior improper corporate practices.

Many companies have appointed new boards of directors-fresh management coming in to eliminate these kinds of practices.

Both the Commission's voluntary disclosure program and its enforcement activities have involved companies engaged in ocean shipping activities.

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For example, the Commission recently brought a civil injunctive action against United States Lines, Inc., alleging various violations of the antifraud provisions of the securities laws in connection with the making of substantial improper and illegal payments totalling in excess of $2.5 million, most of which involved illegal rebates to shippers, together wth fictitious entries in corporate books, and the maintenance of certain funds off the company's books and records.

In another case, the Commission filed suit against Gamble-Skogmo, Inc., and certain other named defendants, in connection with the illegal receipt of rebate payments made to one of its subsidiaries, Gamble Imports Corp. Both of these cases resulted in the imposition of civil injunctions prohibiting future violations of the Federal securities laws upon consent of the companies.

I should also add that several companies involved in shipping activities have voluntarily disclosed these activities. The disclosure by ocean carriers and shippers of improper or illegal payments began in May, 1976, with the disclosure by R. J. Reynolds, that its ocean carrier subsidiary, Sea-Land Services, had engaged in questionable practices, including the payment of rebates in violation of Federal law.

The company announced that it was commencing an investigation voluntarily to uncover the details of these practices. The Commission staff, at the same time, began informally to investigate other companies, both carriers and shippers.

Information provided by R. J. Reynolds was very helpful to us in pursuing that investigation. In September of 1976, R. J. Reynolds announced that its investigation was completed. It concluded, based on its independent study, that more than $19 million in possibly illegal ocean rebates had been paid by Sea-Land. No immunity from civil or criminal prosecution was promised to Reynolds, nor did the company seek such immunity.

As I have mentioned, even before Reynolds' public disclosures in September of 1976, the Commission staff commenced a series of inquiries of various publicly held shippers and carriers, initially utiling the information that Reynolds provided to determine the extent of rebates➖➖➖

The CHAIRMAN. By shippers, would you explain to us what you mean by the shipper?

Mr. ROSENBLAT. Mr. Chairman, I mean a domestic company that uses shipping facilities that uses others to carry its goods. Perhaps I am using the term in a manner that is not technically accurate within the field of law for which your committee is responsible.

The CHAIRMAN. Not necessarily a vessel operated in? You do not -a shipper, a broker?

Mr. CLARK. Shippers as opposed to carriers.

Mr. ROSENBLAT. There are about 20 "shippers". These are domestic companies that use the facilities of the trade to have their goods shipped. And then there are three carriers-two of them I have already mentioned, Sea-Land and United States Lines and there is one other, which has made public disclosure of its practices. The CHAIRMAN. Sea-Land and who else?

Mr. ROSENBLAT. Well, Seatrain Lines, Inc., which reported that it paid rebates from off-book accounts and had inaccurate recording in