The 1971 Institutional Investors Study Report by th Securities and Exchange Commission in its summary volume concluded that the trust departments of banks have sole voting authority over stock constituting approximately 75 percent of the value of the common stock held in employee benefit accounts and have sole voting authority over about 55 percent of such stock in personal trust and estate accounts.

It is not possible from the information obtained from companies on their largest stockholders to ascertain the exact amount of voting authority that resides in each nominee account. This would require extensive additional information from the banks and other institutions with nominee accounts. Thus, the holdings reported herein are not necessarily the equivalent of voting rights.

It would also be useful to attempt to ascertain to what extent the judgment of trust officers is sought and/or accepted by beneficial stock owners where the bank is technically only in an agency or custodial position.

There is another side to the coin that may be worth pursuing. There is considerable evidence that where they have voting authority bank trust departments almost automatically vote with management the overwhelming majority of the time. Displeasure with management is more likely to result in selling shares than in voting against management. It is often the case, of course, that selling on any appreciable scale would have a serious impact on prices of shares of such a company; it thus serves as a deterrent to selling by a bank trust department or other large institutional investor.

Several authors have made the point that banks are very reluctant to use their voting rights to influence management.

Thus, for example, Paul P. Harbrecht in his 1959 study, "Pension Funds and Economic Power", issued by the Twentieth Century Fund notes:

It is quite likely that certain large New York banks will soon approach a point where their combined holdings of stocks for pension funds could give their opinions considerable weight in the councils of the larger corporations. While it is the policy of many large corporations to include provisions in their pension plans to prevent their funds from gaining control of other corporations, no such restrictive policy has yet been announced by the banks. Unquestionably, they will seek to spread their stock investments widely to stave off acquiring the responsibility of corporate direction as long as possible. But as the stock purchases of the pension funds continue to grow, we can anticipate that at some time in the not-toodistant future the banker-trustees are going to be faced with an uncomfortable choice. They will have to buy into a position of authority in the larger corporations or reject profitable investments in order to avoid the responsibilities that accompany large shareholdings.3

In a similar vein, David Ratner in 1970 wrote:

It would hardly lie in the mouths of the institutional managers to complain about being deprived of votes that they have so clearly indicated they do not want. Reducing the voting power of large blocks of shares might actually make their investment job easier. As these

Harbrecht, Paul P. Pension funds and economic power. New York, Twentieth Century Fund, 1959, p. 248.

institutions grow to mammoth size, they find
their opportunities for equity investments lim-
ited to the very largest publicly-held corpora-
tions, which are the only ones in which they can
invest their millions without finding themselves,
willy-nilly, in control because of the number of
votes they can cast. If they could purchase
larger percentage interests in smaller companies
without automatically acquiring the control
position they say they do not want, the access
of the smaller companies to the principal equity
capital markets might be improved.*

Thus it could be suggested that this report is only an opening segment of a study that would truly reflect the impact of institutional stockholdings on management operations and control. This report documents the holdings of many banks and other institutional investors in many of our leading companies. Even in this area, the extent of cooperation of companies addressed was limited. needed as to what the actual voting rights pattern within But beyond this, first a separate investigation would be each nominee account in each bank is, and how that voting pattern was exercised in practice. Finally it would be necessary to investigate the actual impact of the voting pattern; how it correlates with other relationships between the financial institution and the corporation, e.g. through loans, interlocking directorates, and other formal and informal relationships.

D. CEDE AND COMPANY

It will be noted that in a large percentage of the cases Cede and Company is listed as being among the 30 largest shareholders, in fact in many cases the single largest shareholder. The significance of this fact needs to be carefully assessed, as already noted.

Cede and Company was started in 1967 and became fully operational on February 24, 1969, as the nominee for the Stock Clearing Corporation, a wholly owned subsidiary of the New York Stock Exchange, which furnishes a central stock clearing service to numerous member brokerage firms. Thus, it represented deposits in the New York Stock Exchange Central Certificate Service (part of the Stock Clearing Corporation), by participating institutions. On May 11, 1973, the Central Certificate Service was superseded by a new subsidiary, the Depository Trust Company, subject to regulation by the New York Banking Department, making it possible for banks and other institutional holders of securities as well as brokerage firms to become members. The functions of Cede and Company, as the nominee now of the Depository Trust Company, remain essentially the same as what they had been as the nominee of the Central Certificate Service.

For example, as reported by General Electric, the 2,822,602 shares listed under Cede & Company (the third largest holder of GE stock) represented holdings of 188 participants. Similarly, American Airlines reported that there were 144 member firms with shares in the Cede name, none of which separately would be among the top 30 stockholders.

It is perhaps not surprising, in view of this relationship between Cede and Company and member brokerage firms, that there has been some inconsistency in manner of

Ratner, David L. The government of business corporations; critical reflections on the rule of "one share, one vote." Cornell Law Review, v. 56, November 1970, p. 49. (See Appendix G, p. 393.)

29-553 O 74 - 10

reporting of Cede and Company's holdings. Most respondents apparently did not disaggregate brokerage firm holdings within Cede and Company, and reported one lump sum attributable to Cede. Others disaggregated and listed only those individual brokerage holdings within or outside Cede and Company that were among the top 30. Still others, notably several railroads, following the form used in reporting to the Interstate Commerce Commission, listed in a footnote the number of shares held by Cede and Company, but indicated that they are reflected in holdings of brokerage houses where applicable. However, the amount held in each brokerage house account by Cede and Company was not disclosed. Another variation was to indicate the amounts of the largest brokerage accounts within Cede and Company, as well as the total amount of the Cede and Company holdings, and then to subtract the Cede and Company holdings in the amounts reported by specific brokers, where they were among the top 30 holders. According to the Depository Trust Company, Cede and Company is bound by the rules of the New York

Stock Exchange in voting shares of record held by it. Under these rules, stock of record cannot be voted for the benefit of others by members of the Exchange (or their nominees) unless the member firms have transmitted proxy soliciting material to the beneficial owners. Such member firms must vote such stock in accordance with any voting instructions received from the beneficial owners. Member firms may vote such stock in their discretion only if, after soliciting proxies, (1) no voting instructions have been received, (2) they do not have knowledge of any contest as to the action to be taken, and (3) the matter to be voted on will not affect substantially the rights or privileges of such stock.

This leaves open the question as to the extent of actual voting of shares by Cede and Company, the influence it may exert on brokers or others in voting of shares, or the extent to which what voting rights it may have are not exercised. These are all matters deserving of future investigation.

The evidence on stock holdings which the respondents to Senator Metcalf's letter vided and which is presented and analyzed in this report is both illuminating in what it discloses and perhaps even more disturbing in what it fails to reveal. It also points to the need for a great deal more information about institutional holdings as a basis for public policy in the interest of protecting investors and preserving competition.

The Senator's letter of inquiry requested only the simplest of information on stockholders, solely a listing of the 30 largest stockholders of record of 324 of the largest companies of the country. And yet this information was supplied by only 89 companies, or 27 percent of the total. While reasons of confidentiality were cited in a large number of cases as a reason for nondisclosure, as discussed above, the inconsistent nature in which this nondisclosure was applied makes one skeptical, at least, as to the soundness of the position of those who refused to submit data on these grounds.

VARIATIONS IN REPORTING REQUIREMENTS

It was also striking to note the wide variations in current reporting requirements by different Federal agencies as to major stockholdings of companies subject to particular regulatory jurisdictions. These variations help explain the differential in the extent to which companies in various industry groups complied with the Senator's request and suggest the need for far more consistency in the law than currently exists.

Even the limited information which does appear in this report as a result of the responses to Senator Metcalf's letter is sufficient to confirm in graphic detail the enormous size of institutional holdings of stock in major American corporations and, by implication, the vast influence which these institutions have or can have in the financial markets of the country and the managements of these corporations.

It is obvious, however, that much further information is required in order to make an accurate assessment as to the actual power and influence which banks, brokers, and other institutional investors exert on corporate and financial management behavior, the effect which they thereby have on the entire American economy, and the

extent to which greater public disclosure and regulation may be desirable.

MORE DETAILED INFORMATION NEEDED

In the first instance, much more detail on the holdings of particular institutions is needed to determine the role which their holdings permit them to play. In some cases a bank or other institutional investor holds complete fiduciary power, with full voting rights and authority to buy and sell securities. At the other extreme, it has purely custodial or agency responsibilities, with no rights to vote stock or to buy or sell. There are considerable variations in between. Not only is it important to learn the legal rights pertaining to the exercise of authority in handling stocks by various institutional holders, but fully as important is the need to ascertain how these rights are actually exercised. A small beginning was made in this direction by the Securities and Exchange Commission's Institutional Investor Study report of 1971, but even here little information was obtained as to how an institution actually exercised its voting rights, what were the factors that determined its buying and selling of particular blocks of stock, and how its holdings were reflected in the decisionmaking policies of the corporations where its holdings are substantial.

Not only in Congress and among many members of the public, particularly the investing public, but even in the financial press and in financial circles, there has been growing concern over the well-documented rise in the dominance of the institutional investor and the relative decline of the small shareholder. But appropriate remedies have been difficult to come by. This is due, as this report makes abundantly clear, in large measure to the paucity and inadequacy of available information. Clearly information along the lines suggested above must be obtained. Just as clearly, judging from past experience, there will be determined resistance in the institutional investment community against voluntarily supplying such information. Thus a challenge to the Congress exists to ascertain what information should be required, how it can be most effectively obtained, and the extent to which it should be made public.

It is a little publicized but significant fact that the trust departments of banks, brokerage houses, and other financial institutions hold major blocks of stock of American corporations in nominee accounts. Although the basic purpose of such accounts is to be able to handle blocks of stock more efficiently in the interest of the beneficial owners of the stock, nominee accounts also may well put banks in position to use the voting authority provided in such accounts to influence corporate decisions and policy. A nominee has been defined as "a person (or persons) designated to represent or take the place in name only of another person, bank, company, or corporation."

USE OF NOMINEE ACCOUNTS

The use of nominees or nominee accounts by banks, insurance companies, brokerage houses, investment funds, and other financial institutions has become a common and well established practice. In the Twenty-second (January 1973) edition of the Nominee List, issued annually by the American Society of Corporate Secretaries, over 6,000 names of nominees are listed, together with approximately 2,000 banks and other firms in which these nominees are to be found. Nominee registration of corporate stocks is designed to "take advantage of operating efficiencies associated with this practice, especially those related to collection of income and transfer of ownership.'

12

In view of the prevalence of the use of nominees it is surprising that texts and other literature on banking provide scanty information on nominees. The most consistent information has been that provided by the American Society of Corporate Secretaries, already cited above.

The extent of corporate stock ownership held in nominee accounts has never been fully determined. But from the various estimates which have been made, as well as from this survey, it is clear that the number' is large indeed. Thomas Jolls, then vice president of the Northern Trust Company of Chicago, speaking at the 1954 annual meeting of the American Society of Corporate Secretaries, Inc., stated: "As a rough figure, probably 25 percent of the stock of our leading corporations is registered in the name of brokers or bank nominees."3

GROWTH OF TRUST DEPARTMENT ASSETS

The American Bankers Association has estimated that the market value of common stocks in personal trusts administered by banks with trust assets of $10 million or more amounted to $30.7 billion in 1958 and $37.2

billion in 1959. By 1969, according to a study of the Securities and Exchange Commission, trust departments of commercial banks in the United States administered $180 billion of common stock. The 50 largest trust departments, as of the end of 1967, during 1969 adminis

Fischer, Gerald C. American Banking Structure (New York, 1968), p. 88.

2 Ibid., p. 86.

American Society of Corporate Secretaries, Inc. Report, Eighth Annual Meeting, May 31-June 2, 1954, p. 45.

American Bankers Association. The Commercial Banking Industry. (Englewood Cliffs, N.J., 1962) p. 302.

tered $131 billion or 73 percent of the $180 billion total.' They also are estimated to exercise sole voting authority for $72 billion (market value) of common stocks, or 55 percent of the $131 billion of stocks they administer. These common stocks are in not just the personal trust and estate accounts referred to in the American Bankers Association study above, but also in employee benefit accounts and agency accounts.

SIGNIFICANCE OF TRUST DEPARTMENT HOLDINGS

Recognizing the magnitude of stock holdings by bank trust departments and other financial institutions, the crucial and thus far largely unanswered question is what these holdings mean in terms of bank control of, or influence on, the corporations whose stocks are held by these institutions, and of their impact upon the securities

markets.

VARIATIONS IN TRUST DEPARTMENT AUTHORITY

ture," writes: "the bank's authority may vary from full Gerald Fischer, in his text, "American Banking Strucpower to buy, sell, and vote the stock to virtually no power whatsoever, with the beneficial owners able to exercise all prerogatives of ownership."

Further detail on the variance in scope of bank authority with respect to stocks it holds as trustee is given in a letter from the chairman of the Board of Governors of the Federal Reserve System, William McChesney Martin, Jr., to Congressman Wright Patman, dated October 9, 1962. For purposes of its analysis the Federal Reserve Board used the following classification of relationship between bank nominees and beneficial stock owners, which is that used by the American Society of Corporate Secretaries in its Nominee List:

(a) Estates

(b) Living and testamentary trusts
(c) Pension trusts

(d) Investment management accounts
(e) Corporate trust accounts

(f) Safekeeping or custody accounts (domestic)
(g) Safekeeping or custody accounts (foreign)
(h) Legal and common trust funds

In cases (a) estates, (b) living and testamentary trusts, and (h) legal and common trust funds, the bank acting as executor, administrator, or trustee exercises all incidents of legal ownership, including the power to exercise voting rights with respect to corporation stock shares it holds. In these cases, in the absence of contrary provisions which may be contained in individual governing trust instruments, shares held in the fiduciary capacities would

8 U.S. Securities and Exchange Commission. Institutional Investor Study Report. Summary Volume. (92d Congress, 1st Session, House Document No. 92-64, Part 8). March 10, 1971. p. 34-35. Fischer, Gerald. Op. cit., p. 86.

7

In: U.S. Congress. House. Select Committee on Small Business. Chain banking, stockholder and loan links of 200 largest member banks (Washington, U.S. Govt. Print. Off., 1963), pp. 16-17.