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ordinarily be voted by the bank as fiduciary by executing a proxy in the name of its nominee, the record owner of the shares.

Similar rights and responsibilities of ownership attach to property held for accounts in category (c), trustee for pension trusts, and similar trusts held for employee benefit purposes. However, it often occurs that the trust instruments creating such relationships contain provisions reserving the voting rights on stock so held to the management of the corporate creator of the trust, usually a designated management group or pension committee.

With regard to categories (d), (f), and (g), the bank acts in an agency capacity for the legal owners. Such owners retain all voting rights with respect to stocks so held. Where nominee registration is employed for stocks held under agency safekeeping, or custody relationships of such kinds, the execution of proxies on behalf of the nominee to vote stocks so registered would be exercised by the bank in its fiduciary capacity, but only upon the written authority and direction of the legal owner of the securities.

With respect to category (e) corporate trust accounts, it was impossible to generalize. It was the feeling of the Board of Governors that voting of virtually all stock held in nominee names under corporate trust or corporate agency relationships would be subject to the written direction of the management of the corporation concerned.

In the SEC Institutional Investor Study Report, cited above, it was estimated that of the total assets administered by the 50 largest bank trust departments employee benefit accounts [category (c)] represented 41 percent, personal trust and estate accounts [categories (a), (b), and (h)] 40 percent, and agency accounts [categories (d), (f), and (g)] 19 percent.8

In summary the SEC study concluded, "The trust departments 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 approximately 55 percent of such stock in personal trust and estate accounts." 9


There still remain large areas of lack of information. It is not clear to what extent the judgment of trust officers is sought and accepted by beneficial stock owners where the bank is technically only in an agency position. Nor is it manifest how strictly trust departments exercise their voting authority exclusively in terms of the greatest benefit, short and long run as they see it, for the beneficial stock owners, or to what extent they are influenced by bank lending practices, directorships held by bank officials, advisory posts held by bank officials, or other considerations in attempting to affect corporate policy. Thus it is not surprising that the literature on nominees contains such comments as:

It is apparent that there is no easy way to judge the precise significance of nominee stockholdings Aside from actual power over the stockholdings, the question arises whether the nominee holdings as a matter of practice constitute a consolidated and unified block relative to matters of management. The further

The above percentages in the aggregate would also include category (e) which cannot readily be classified into any one of the three groupings in the SEC since it overlaps the second and third category. Source: U.S. Securities and Exchange Commission, op. cit. p. 35.

• Ibid., p. 35.

question arises as to the independence of action a given bank will exercise if its so-called competitor banks have important stock positions through nomince holdings.10

The Patman Study (the House Small Business Committee report cited immediately above) quite properly raised a number of important questions regarding the independence of action of a given bank if its competitors have important stock position in it through nominee holdings *** additional investigation of this question is needed."


Despite this lack of firm data on nominee holdings, the conclusions in various studies leave little doubt that they permit bank influence which could be substantial. The existence of sizeable blocks of stock held in the name of one or more nominees of a bank gives that bank considerable power in the way it exercises the voting rights it has itself and the influence it is in a position to exert on beneficial owners where it occupies an agency role.

The Institutional Investor Study Report of the Securities and Exchange Commission for example concludes, in part:

Among the securities that a bank trust department can choose to hold are stocks in companies with which the bank has commercial banking relationships. It appears that increased demand deposits by a company at a bank were, to a statistically significant degree, associated with larger holdings of the company's stock by the bank's trust department.12

There appeared, according to this study, to be less significance to loans to a corporation by a bank's commercial department as a factor in trust department holdings of stock of that corporation.

In its conclusion to Chapter 15-C, "Institutional Relationships with Portfolio Companies-Concentration of Stock Holdings," the same study finds:

Concentration analysis establishes that institutions, particularly banks, have the potential economic power to exert significant influence over many of the companies whose securities comprise their portfolios. Most of these companies in which high concentration of institutional stock holdings exists are large companies.

Ordinarily, however, it is necessary to aggregate the holdings of several institutions before these holdings constitute a substantial percentage of any company's outstanding shares. While such statistical aggregation may disclose potential economic power by a group of institutions, it does not permit the inference that institutions will, in fact, act together or that the power of any one institution will necessarily be augmented through concerted action with other institutions. 13

Other conclusions of this study may be quoted more briefly:

10 U.S. Congress. House. Select Committee on Small Business, op. cit., p. 17.

11 Fischer, Gerald. op. cit., p. 88.

12 U.S. Securities and Exchange Commission, op. cit., p. 38.

13 U.S. Securities and Exchange Commission Institutional Investor Study Report, v. 5, p. 2561.

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Finally, the staff report for the Subcommittee on Domestic Finance of the House Committee on Banking and Currency, "Commercial Banks and Their Trust Activities: Emerging Influence on the American Economy," dated July 8, 1968, may be cited as follows:

It is important to note that while an individual who holds a few or even a few hundred shares of stock in a corporation having several thousands or millions of shares outstanding does not regard his voting right as significant, a corporate trustee who can combine the voting rights of hundreds or thousands of such small holdings into significant voting power regards the voting right as a very valuable asset.

14 Ibid., p. 2750.

15 Ibid., p. 2763.

This concentrated voting power can obviously be used for many purposes, among them the control of boards of directors and officers, as well as influencing the policies of the corporation in which the stock is held. When these holdings involve the stock of a competitor institution such voting control could significantly affect the degree of competition between institutions. When these holdings involve the stock of one's own institution the serious possibilities and problems, among others, of self-dealing and self-perpetuation of management in office must be considered. This is one reason why the extent of bank stockholdings held and controlled in one degree or another by banks and trust companies, as well as by other financial institutions, is of major significance in any study of the structure and economic power of the banking industry within the American economy. (p. 804)


At this stage, then, it seems fair to conclude that the stocks held in nominee accounts of banks' trust departments and in other institutions do in fact put these institutions in a position where they can exert significant influence, through voting and otherwise, on corporate decisions and policies.

At the same time, largely unknown is the extent to which these institutions actually use the power the nominee accounts provide to influence corporate decisions, how far they simply support management, how far the trust department accounts influence, or are influenced by, bank loans to and deposits by major corporations. These are all difficult questions that would be worthy of further exploration.

Part II

The Need for Disclosure Regarding Concentration of
Voting Rights Among Institutional Investors








During the spring of 1973 I was a Visiting Professor of Finance at the College of Business Administration, University of South Carolina. When the unique opportunity to prepare an analysis of the special tabulation of the SEC data collected for the 1971 Institutional Investor Study Report was offered to me, Dean James Kane and Professor Richard Furst of South Carolina both encouraged me to accept the assignment. The College generously provided the resources needed to prepare a massive tabulation rather quickly and to type the extensive tables that accompany this report. Several hundred hours were spent in preparing these tabulations by the following graduate students at the College:

M. E. Abdel-Kader, David F. Bernthal, David T. Livingstone,
Clayton S. Long, William K. Lowry, Dennis L. Rebber, Susan M.
Webb, and James K. Weeks.

Without the resources provided by the University of South Carolina and the time given to this project by the students named, this project could not have been completed. For any errors that may have occurred in the tabulations made from the basic source materials, and for all the interpretations of that material, I alone am responsible. The basic tabulations also contain much additional, unique materials that would be important both to scholars and for policy formation; these materials are still unanalyzed.

One deep regret is that such important data as those discussed in the body of the report do not become available in usable form until about 4 years after they have been collected. One can hope that such data will become available on a regular and timely basis in the near future.


Robert M. Soldofsky.

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