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specific penalty to be utilized. At one end of the spectrum would be the purely monetary penalty, at the other end would be the penalty which results in the withholding or prevention of some desired action. Selection of the specific civil penalty involves considerations of policy appropriate for legislative and administrative determination.

8. Monetary

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In respect to a civil penalty which is monetary, it may not be possible to formulate a satisfactory figure. More precisely, the figure may have to be rather substantial in order to induce compliance. However, if too substantial, it might be deemed retributive rather than remedial or regulatory, thereby resulting in its characterization as criminal. Furthermore, as a practical matter, the effective enforcement of a civil monetary penalty against a foreign parent firm or a wholly foreign firm would, of course, depend upon the presence in the U.S. of property upon which a Court judgment could be executed. A trade office or commodities which the foreign entity holds title to may serve this purpose. However, it is conceivable that internal corporate structure and contract terms could be altered in such a manner so as to undermine collection efforts..

b. Non-Monetary Penalties

Non-monetary penalties for failure to comply with expanded reporting requirements would be inherently regulatory, but their imposition raises other concerns. For example, the Export Administration Act of 1969, as amended, authorizes export controls only in situations of short supply, or for reasons of foreign policy or national security. It is doubtful that export limitations for failure to report export sales information would fall within one of these catagories. Therefore, legislation would be required in order to provide for specific export licensing procedures coordinated with any new reporting requirements.

Another penalty considered by this office would involve the withholding of export inspection services for persons who have not reported export sales transactions. In our estimation, this would necessitate a revision of the Grain Standards Act. The Congressional policy behind this statute is to provide for the promotion and protection of U.S. commerce and the general welfare of the people, of the United States through the orderly

marketing of grain. Since the statute now provides for the refusal of inspection or weighing services to a person who violates certain provisions which relate to inspection and weighing, the statute would have to be expanded to include failure to report export sales as a basis for refusal to inspect.

As we understand, some form of limitation relating to commodity futures trading has also been considered as a possible civil sanction and that a bill to effectuate such a provision has been introduced. We will be commenting on this bill by separate memorandum, but we defer any analysis of the feasibility of this limitation to the Commodity Futures Trading Commission in view of the complexity of the issues involved.

3. General Procedural Considerations

Care must be taken to assure that administrative action or enforcement is not arbitrary or capricious. Regulations implementing the statute, or the statute itself, should set forth detailed procedural guidelines to safeguard individual rights. These procedures should include, among other things, provision for adequate notice to affected parties with an opportunity for a hearing concerning whether the imposition of the stated penalty is warranted. In this regard, it should be noted that evidence that a foreign entity made a sale which was not reported may be difficult to acquire in situations where direct auditing of the foreign entities' books is required in order to obtain proof of the sale. Generally, audits may not be enforced outside of the territory of the United States. However, this may be overcome if, as part of the reporting program, foreign entities are required to agree to permit such audit at the risk of being subject to the imposition of the civil penalty just as if they failed to properly report.

N.L. Plotka

NORMAN L. PLOTKA
Acting General Counsel

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APPENDIX II.-A STUDY OF RELATIONSHIPS BETWEEN LARGE EXPORT SALES AND FUTURES TRADING, by Richard Heifner, Kandice Kahl, aND LARRY DEATON, USDA, DATED JUNE 8, 1979

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Positions of Exporters During the Week of Sale............
Positions of Exporters Before and After the Week of Sale.. 32

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Gains and Losses on Positions Held by Exporters...... Conclusions..

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Appendix A: Forms Used by Firms to Report Futures and Cash
Grain Positions to CFTC......

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Appendix B:

Review of Futures Price Movements and Related Economic
Developments Associated with Large Export Sales.....

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SUMMARY

The exporters involved in a sample of large export sales during 1975-78 made relatively small use of futures markets for hedging during the week of sale, but apparently experienced capital gains on the average from their futures positions and overall positions held prior to the sales. These results arise from analyzing futures price changes and futures and cash positions of exporters for 20 selected periods of large wheat, corn and soybean export sales. Each period includes a single large sale or a series of sales by one or more exporters to a single foreign country. A total of 29 cases of sales by individual exporters were analyzed. Information on the cash and futures positions of the exporters involved was provided by the Commodity Futures Trading Commission.

Futures prices increased and decreased with almost equal frequency during the periods in which the large export sales were reported, suggesting that the price impacts of the sales were reasonably well anticipated by the trade. Although the evidence is not very strong, some anticipation of forthcoming sales is also indicated by the tendency for futures prices to rise more often than decline during the week prior to the announcement of the sales.

Instead of buying futures contracts at the time of the reported sale, the exporters in the sample tended to take reductions in their existing net long positions. And during the week of sale their purchases in the cash market tended to exceed their futures purchases. The exporters involved were most often net long in futures, and even net long in their overall positions, both before and after the export sales were reported, but there was relatively little buying of futures during the week of sale.

The exporters in the sample as a group apparently experienced capital gains on their futures positions and on their overall positions during 3-week intervals preceding the sales. However, their estimated gains and losses varied markedly from case to case. They tended to take losses on their cash positions during 3-week intervals after the sales occurred. The study lends some support to the notion that exporters were able to take profitable positions in the futures markets before export sales were reported. But because of the variation among cases and the degree of approximation involved, and in view of the cash market losses experienced by some exporters, it is not clear that the futures profits were greater than justified.

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