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SUMMARY ('ommon stock held by institutional investors has increased with amazing rapidity since 1950.

Bank trust departments comprise the largest segment of the institutional investors, which includes investment complexes insurance companies, and others.

By 1980, financial institutional stockholdings may be approaching half of the entire market value of stocks,

Government reporting requirements regarding stockholdings by institutional investors are inadequate, especially as regards banks.

Institutional investors may have significant impact on companies, including competitors, through voting of stock, loans, interlocking boards of directors, and negotiation of mergers,

Unique data, collected by the Securities and Exchange Commission and analyzed in this study, show the concentration of sole voting rights among unnamed institutional investors in named companies, including companies within the same industry.

Disclosure of holdings of 1 percent or more in a company by institutional investors would not be burdensome to report.

Disclosure--and disinvestment of large holdings over a period of timewould help stabilize the market and reduce the likelihood of self-dealing and contlicts of interest related to nondisclosure.

The continuing growth of institutional holdings of voting stock increases the urgency for review of public policy in these matters.

(141)

Part IIThe Need for Disclosure Regarding Concentration of Voting Rights

Among Institutional Investors

OBJECTIVES

on S. 448, before the Senate Subcommittee on Intergovern

mental Relations, Senator Lee Metcalf and Chairman The objectives of this paper are fourfold:

William J. Casey of the SEC discussed the inadequacy of (1) To disclose-within the limits of available data-the the corporate ownership data published in the Institutional voting rights to common stock held by institutional Investor Study Report of the Securities and Exchange Cominvestors where more than 1 percent of the stock is mission. During this interchange Chairman Casey agreed held by one institution;

to furnish and did provide data showing the extent of the (2) To demonstrate the extent of the holdings of a common stock holdings in almost 800 companies by: significant amount of voting stock, of several companies (a) the 50 largest bank trust departments, (b) the investin one industry, by an individual financial institution, ment advisors for the 71 largest registered investment such as a bank trust department or a regulated investment companies or complexes, (c) the 25 largest property and company;

liability insurance groups, (d) the 26 largest life insurance (3) To indicate the extent to which a small number of companies and (e) other lesser institutional investors. financial institutions may dominate the voting stock of a These data are the basis for the new information presented group of companies in an industry; and

and analyzed in the present study. The institutional (4) To discuss desirability of disclosure of information investors are not identified by name, but the companies regarding holdings of significant amounts of stock. in which they hold stock are identified.

The growth of institutional holdings will be projected to the year 2000. The final section of this report includes

THE INSTITUTIONAL INVESTOR STUDY some relevant historical data about the growth of the

STOCK SAMPLE market value of stocks and the growth of bank trust department stock holdings. Appendix 1 presents details

The sample of 793 common stocks used in the Instituof the extent to which the holdings of 90 attractive tional Investor Study (119) report is composed of 562 stocks companies are concentrated in the hands of bank trust

listed on the New York Stock Exchange (NYSE) and departments, regulated investment companies and other

American Stock Exchange (AMEX), and 231 traded financial institutions.'

nationally in the over-the-counter markets (OTC). The Appendix 2 presents the details about the concentration

NYSE sample included the 27 stocks listed there with the of holdings by financial institutions within broad industry the AMEX and 150 from the OTC. The remaining 318

largest market value and 198 drawn randomly, 100 from groups. The relative and absolute size distribution of holdings distributions or because they had been used in previous

stocks were selected for specific reasons such as secondary of portfolio companies by the bank trust departments, by studies.5 regulated investment companies and other institutional investors included in the sample is reported in this paper. THE SPECIAL SECURITIES AND EXCHANGE A preliminary effort is made to show the extent to which

COMMISSION TABULATION such holdings may exist among all companies whose stock is traded on the organized exchanges and in the The first part of the special SEC tabulation, provided to over-the-counter markets. Reasons for disclosure of such Senator Metcalf by Chairman Casey, listed each stock in information are suggested, and the most generally useful the portfolio of each of the financial institutions surveyed places for such disclosure are named. One related and as of September 30, 1969, the date for which the data were important issue considered is that of full and partial voting

Regulatory Agency Budgets, Hearings before the Senate Subcomrights that bank trust departments have in securities that

mittee on Intergovernmental Relations of the Committee on Governthey hold.

ment Operations, 92nd Congress, 2d. sess., February 22 and 23 and DATA BASE

May 17 and 25, 1972 (Washington, D.C.: Government Printing
Office, 1972), pp. 443-456.

: Institutional I nvestors Study (113) Report, the Securities and The basic data for this study were provided by the Secu- Exchange Commission (Washington, D.C.: Government Printing rities and Exchange Commission. During the 1972 hearings Office, 1971), vol. 3, pp. 1309-1310.

• The term, "holdings," rather than "ownership" is being used

because bank trust departments generally do not take title to the 1 Although the sample used in this study covered 800 stocks, in securities that they manage. They act in various agency and only about 90 cases was the proportion of the stock held by the fiduciary capacities for the beneficial owners of the stock they hold. financial institutions as a group at about the 15 percent level or In the case of the other financial institutions the term "ownership" above. In order to keep the mass of detail within manageable bounds may be used in its traditional sense. We hope that we have used the and to focus attention upon these instances in which portfolio term holdings consistently throughout this paper to refer to the concentration levels were high enough to be a matter of concern, position of bank trust departments for the securities over which only 90 (of the 800) companies included in the portfolios of the they have administrative and decision-making responsibilities. institutional investors were analyzed. (Of course, a part of the 800 suls, vol. 3, pp. 1308-1309. Several stocks were eliminated from companies are among the holdings of many individual investors.) the sample for a variety of acceptable reasons which are described A company held in the stock portfolio of an institutional investor in this source. The basis for selecting the 800 stocks in the sample is called a "portfolio company's for convenience.

is discussed in this reference.

50 bank trust

32. 390

24. 057
23. 462
23. 116

28. 381 26. 391

provided in the IIS report. Within these listings for each

Portfolio concentrations of the financial institutions, the specific portfolio companies

in sample (percent) were named but the institution (for example, bank trust departments) was not identified by name. The individual

All financial

Company institutions by type were listed in rank order in terms of

departments institutions their average voting concentration percentage. In order to

32. 925

47. 474 compute this average, the percentage of the outstanding Emery Industries --

30, 632 General Reinsurance Corp....

38. 239 stock held in each of the portfolio companies was totaled

Gulf Oil Corp

28. 870 and divided by the number of different companies whose

TRW, Inc...

26. 762

30. 855 stock was held. In this way the bank trust department Northrop Corp

24. 529

26. 066 ranked as No. 1 need not beand probably is not-the Trans World Airlines.

Northwest Airlines. bank with the largest amount of trust department assets.

Actna Life & Casualty.

27. 263 The bank trust department ranked No. 1, for example,

Trane Corp--

22. 522

27. 604 was identified by the same ranking number in other parts of the special tabulation. Similarly, each type of financial institution was identified by a number and each orga- individual bank trust departments by rank number. Direct nization of that type was ranked in terms of its average cross references were not specifically provided between percentage of voting authority. In the case of banks the the two special tabulations. ranking was in terms of sole voting authority only; holdings in which the bank was authorized to exercise partial

Bank Data Unique voting rights were reported by the SEC but are not

This detailed information about the holdings of bank included in this study.

trust departments is, to my knowledge, unique. The 1968 The second part of the special SEC tabulation listed

Patman Committee study reported bank trust departthe portfolio companies included in the sample and pre

ments holdings down only to the 5 percent concentration sented separate tabulations for each of the types of insti

level. At that time the staff of the Patman Committee was tutions. Within the listing for each institutional investor group, such as bank trust departments, the portfolio author learned at about that time that many large trust

unable to obtain more detailed information. However, this companies were ranked in order of their total portfolio departments had an informal rule against owning more concentration percentage for that type of institution only. For example, the 50 bank trust departments held 32.925% summarized in Table 1 show the extent of portfolio con

than 5 percent of the stock of portfolio companies. Data of the outstanding stock of Emery Industries, which was

centrations down to the 0.75 percent level for the sample the highest concentration percentage for any of the companies whose stock was held by the bank trust depart- level was reported

by the SEC.

companies, although the detail down to the 0.001 percent inents. The highest 9 portfolio concentration percentages

The first part of Table 1 includes a summary of individfor the stocks in the sample are tabulated below.

ual portfolio concentration percentages for the 50 bank Within the second part of the special SEC tabulation,

trust departments as of September 30, 1969. As shown in the holdings of each bank trust department, for example,

Table 1 there were some 205 instances in which there were were listed separately and ranked in order of their specific holdings of 1 percent or more and 167 holdings from 1 to portfolio concentration ratio for individual companies. In

5 percent. the case of Emery Industries, Inc., the highest five individual concentration percentages by bank trust depart- * U.S. Congress, House Committee on Banking and Currency, ments were as follows: 26.887, 4.420, 0.950, 0.307, and

Commercial Banks and Their Trust Activities; Emerging Influence on

the American Economy, Staff Report for the Subcommittee on 0.203 percent. Cross references to the first part of the

Domestic Finance, 90th Congress, 2d. sess., July 8, 1968 (Washspecial SEC tabulation permitted identification of the ington, D.C.: Government Printing Office, 1968).

Table 1.-PORTFOLIO CONCENTRATION LEVELS OF 0.75 PERCENT OR MORE IN SAMPLE OF 800 STOCKS INCLUDED IN

THE “INSTITUTIONAL INVESTORS STUDY”. (HOLDINGS OF INDIVIDUAL INVESTMENT INSTITUTIONS AS OF SEPT. 30, 1969)

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Source: Summary of data in appendix D, tables 1-A and 1-B, pp. 345-356. The regulated investment companies and other financial institutions are presented in the right-hand columns of institutions also held substantial amounts of the same Table 1. sample stocks held by bank trust departments. The Table 1 shows 577 instances in which individual instituportfolio concentration percentages for all of the financial tional investors held 1 percent or more of the outstanding shares in the portfolio companies in the September 1969 only about one-fourth or one-fifth of the individual insample. Some 205 instances or about 35 percent of the stances of 1 percent or above concentration levels for total were recorded for bank trust departments.

regulated investment companies. Appendix Table 1-A shows the details for the 50 stocks Obviously more comprehensive studies of individual in which the 50 bank trust departments have the largest portfolio concentration levels are needed to establish their total portfolio concentration percentage. The concentra- present and rapidly growing extent. Even though the tion percentage for the 50th company is just under 15 present and growing magnitude of individual portfolio percent.

concentration levels are not yet well established, reasons These appendix tables list a so the holdings of each of for the importance of this subject and for regular public these 50 portfolio companies by the other financial institu- disclosure of these and other portfolio concentration data tions. The holdings of the regulated investment companies are becoming increasingly evident and widely discussed. (which as a group constitute the second largest instituitional owner of common stock) are shown separately.

DESIRABILITY OF DISCLOSURE OF CON. Their portfolio ratio rank is given also. There is a separate CENTRATION ABOVE ONE PERCENT concentration rank for each portfolio company within each financial institution listing. Appendix Table 1-B lists the

At least eight important reasons for public disclosure of same type of data as Appendix l'able 1-A for 40 companies

portfolio concentrations of 1 percent or above exist. The in addition to those listed in Appendix Table 1-A. For

areas of concern, discussed briefly in this section, are: example, 29.37 percent of Great Western Financial

(1) Price effects of concentrated ownership; common stock is held by regulated investment companies; (2) Liquidity effects of concentrated ownership; this percentage is the third highest concentration per

(3) Public right to know and so have ready access

to such information; centage among regulated investment companies. However the 50 bank trust departments held only 0.043 percent of

(4) Extent of the portfolio concentration by indithis stock and it stood 595th out of 800 in the sample as

vidual financial institutions and by groups of instifar as bank investors were concerned.

tutions; These 40 additional companies are those for which the

(5) Disclosure of portfolio concentration of several total portfolio concentration is 15 percent and above but

companies in same industry by one or a group of

financial institutions; which are not included in the bank trust department list. Table 1-B includes all of those portfolio companies in the

(6) Special problems that might exist or develop in

broadcasting and publishing industries; sample for which the concentrations are above the 15 percent level held by regulated investment companies, except

(7) Uniformity of treatment of financial institutions;

(8) Future growth of individual portfolio concentrafor the seven companies for which the bank' trust departments held 15 percent or more. These seven companies

tions, and industry and overall concentration levels.

The reasonableness of the 1 percent level as a threshold were Northwest Airlines, Control Data Corp., Burroughs Corp., Connecticut General Insurance Co., Polaroid, point for public reporting will be discussed. National Airlines and Sperry Rand.

1. Price Effects of Concentrated Holdings Totals as Estimated From Institutional Investor When a substantial proportion of the stock of a specific Study Sample

company is in the hands of one or a few institutional The 1969 IIS sample of 800 stocks was prepared in such

investors, the effect of either good or bad news may result

in very substantial price movements in the stock. Institua way as to make an estimate of the total number of

tional investors seem to react as a group to a marked instances of portfolio concentrations of 1 percent or above very hazardous. The estimates for the total number

change--or even the rumor of a marked change-in the of portfolio concentrations at the 1 percent level are

outlook for a company or a group of companies in the

same industry. Relatively large orders to buy or sell much better than educated guesses but they cannot be

stocks may cause tension or even distress in the market for defended on the basis of sampling theory as that term is used in statistical theory.

a specific stock. The liquidity and price effects of concen

trated holdings are closely related. Some scattered information will help form a reasonable estimate of the total number of instances in which indi- 2. Liquidity Effects of Concentrated Holdings vidual institutional investors held 1 percent or more of outstanding shares of a portfolio company. At the end of

When a company is the subject of adverse news-even 1969, 1,290 common stocks were listed on the NYSE slightly adverse news—the attempts of one or more but only 562 of these stocks were included in the sample. institutions to sell some or all of their holdings often Perhaps only about one-half of the instances of individual

unbalances a market enough to cause the price of a 1 percent concentration levels were included in the TIS specific stock to drop sharply. Organizations that may sample. However, the unusual way that the sample was

need to sell securities at such a juncture in order to obtain drawn leaves such an inference open to challenge. The required funds are especially disadvantaged and may special tabulation prepared from the IIS data listed 48 sustain large losses. These losses may cause severe damages instances in which the regulated investment companies

to the institution(s) involved. A point to keep in mind is as a group held 15 percent or more of individual port

that institutional investors are investing "other people's folio companies as of September 30, 1969. At the end of money.” Both individual and institutional investors 1971, Wiesenberger's Investment Companies--1972 listed might be able to avoid some of the liquidity pressure and 219 instances in which the concentration level, computed

losses if they knew who the other larger institutional apparently in the same way, was 15 percent or above.? This bit of information suggests that the sample may show

ABSENCE OF INDIVIDUAL INVESTORS i Investment Companies1972 (New York: Wiesenberger Services,

In a recent speech Mr. G. Bradford Cook, formerly Inc., 1972), p. 477.

Chairman of the Securities and Exchange Commission,

Owners were,

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