Treasury Secretary Donald T. Regan yesterday banned the issuance of U.S. government-backed bearer securities by private securities dealers to foreign investors, which have been sharply criticized in Congress.
Regan, in letters to Sen. Robert Dole (R-Kan.), chairman of the Senate Finance Committee, and Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, said he was prohibiting the issuance abroad of the controversial securities in an effort to make tax treatment of all securities consistent and to prevent competition for the federal government in sales of U.S. securities to foreigners.
The Treasury Department issued the ruling in response to a Senate resolution last month condemning the issuance of such unregistered securities. The Senate was concerned that American citizens or residents could evade U.S. taxes by purchasing the bonds, which allow the bondholder to remain anonymous.
Sen. Howard M. Metzenbaum (D-Ohio) introduced a nonbinding resolution after several members of Congress became concerned about a plan by a group of securities firms and banks to purchase $1.7 billion of 30-year government bonds and repackage them for sale overseas as bearer securities.
The Treasury Department also had been considering issuing its own bearer bonds directly to raise capital in the lucrative foreign investment market. However, Regan prohibited the Treasury from issuing them following pressure from Congress.
Instead, the Treasury will issue special registered securities to foreign investors that will keep the identity of the interest and bond recipient secret. However, financial institutions that sell them to foreigners must certify that the purchasers are not Americans.
Bearer bonds are popular abroad, where investors prefer to buy securities anonymously.
Regan said in his letter to Congress that "as a tax policy matter," a transaction should be "treated according to its substance and not its form."
In addition, Regan said that the second reason for his decision "is one of fairness to U.S. government issuers and the taxpayers that ultimately bear the burden of interest paid on U.S. government securities.
"If repackaged U.S. government securities may be issued in bearer form, they will compete in the marketplace against the U.S. government securities issued directly by the U.S. government issuer," Regan noted. "If the repackaged security issued in bearer form obtains a lower yield, however, it will not accrue to the benefit of the U.S. government or our taxpayers but will go instead to the private intermediary."
Regan said that the rules of compliance "are carefully designed to provide the maximum protection against evasion of tax by U.S. persons, while permitting U.S. borrowers to obtain efficient access to foreign capital." Regan said he hoped the new rules would "deter tax evasion by U.S. persons but not impede legitimate transactions in the international financial markets."
Metzenbaum had said that if Regan didn't acted to curtail sale of U.S. government-backed bearer bonds, he definitely would introduce legislation to stop it. "I will keep on this subject until I'm satisfied," Metzenbaum said. The senator could not be reached for comment last night.
All securities backed by U.S. government bonds are covered under the prohibition, Treasury Department officials said. Treasury defined U.S. government securities as those issued by the Treasury, other U.S. government-owned agencies or a U.S. government-sponsored enterprise or an obligation guaranteed as to interest or principal by the U.S. government.
Such a security will be considered a U.S. government-backed instrument if more than 50 percent of the income or collateral supporting the security consists of income or principal of a U.S. government security, Treasury said.