Some of the most complicated securities issues that arose from World War II involved the resumption of trading in Axis securities. The SEC played an important role in resolving these problems, along with the Army and Departments of State, Treasury and Justice.
Three principal issues emerged regarding such securities. First, the United States was concerned that German bonds, denominated in U.S. dollars, which had been confiscated by the Nazis, would begin trading in the U.S. Second, the administration was worried that German dollar bonds, which had been looted from Berlin by the Soviets, would find their way into the U.S. market. Finally, Germany had defaulted on its sovereign bonds and the United States insisted that Germany settle its defaulted debts in offerings registered with the SEC.
The SEC spent years working in inter-agency groups trying to resolve these problems. In 1951, West Germany agreed to recognize all of its pre-war external debt. In consultation with the State Department, however, the SEC refused to lift its ban on brokers effectuating transactions in German bonds. With the Cold War now raging, the SEC was particularly concerned about German bonds which had been looted by the Russians. The SEC, along with other U.S. government agencies, took the position that transfers of such securities should not occur until a validation program was in effect, which would guarantee that the seller was the rightful owner.
As a full settlement was approaching, the SEC, at the invitation of the State Department, sent a representative to London to participate in a conference on German external debt. The final breakthrough occurred in 1953 when SEC Chairmen Ralph Demmler headed a mission to Germany to discuss the German debt situation. That year, West Germany established an acceptable validation program. Working closely with the German government on information required in its registration statements under the 1933 Act, the SEC eventually was satisfied with German disclosures.(40)
By January 1954, the SEC supported allowing certain German government securities to begin trading in the U.S. after they were validated. The SEC issued Rule X-15c2-3 which prohibited brokers and dealers from trading German securities which had not been validated. All dollar-denominated securities required an attached validation certificate. With adoption of the rule, the SEC also withdrew its request that brokers and dealers refrain from affecting transactions in West German sovereign securities.(41)
The issue of the debt of West German industries remained. The SEC again took the position that German issuers needed to register any exchange offer before their securities began to trade, and that these issuers needed to make the same disclosures as American issuers. Chairman Demmler told the agency responsible for settling German debt that "American standards of disclosure had been built up to a point from which they should not be permitted to recede." He continued, "[I]f our standards were relaxed in favor of foreign issuers, we might be confronted with American corporations asking for ‘most favored nation' treatment.'"(42) Eventually, dozens of German issuers filed registration statements, with disclosures similar to those required of U.S. issuers.
The SEC once again forged its position regarding foreign issuers in the midst of crisis. As in the 1930s, it was confronted with defaulted securities, with the additional problem of the securities having been stolen. Emerging from this complicated situation was the SEC's position that it would not allow foreign issuers any leniency or accommodation. Unlike the 1920s, however, the United States was now the world's leading capital market. If a foreign issuer wanted to raise capital, the United States was the place to be.
(40) 1953 U.S. Securities and Exchange Commission Annual Report
(41) January 11, 1954 SEC Release on trading in German securities and adoption of Rule X-15C2-3 (courtesy of the National Archives and Records Administration)
(42) March 29, 1954 Memo from SEC Chairman Ralph H. Demmler to Byron D. Woodside, Corporation Finance, and Anthon H. Lund, Trading and Exchanges, on validation board for German dollar bonds (courtesy of the National Archives and Records Administration)
