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SUMMARY

Common 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 conflicts 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.

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

OBJECTIVES

The objectives of this paper are fourfold:

(1) To disclose within the limits of available data-the voting rights to common stock held by institutional investors where more than 1 percent of the stock is held by one institution;

(2) To demonstrate the extent of the holdings of a significant amount of voting stock, of several companies in one industry, by an individual financial institution, such as a bank trust department or a regulated investment company;

(3) To indicate the extent to which a small number of financial institutions may dominate the voting stock of a group of companies in an industry; and

(4) To discuss desirability of disclosure of information regarding holdings of significant amounts of stock.

The growth of institutional holdings will be projected to the year 2000. The final section of this report includes some relevant historical data about the growth of the market value of stocks and the growth of bank trust department stock holdings. Appendix 1 presents details. of the extent to which the holdings of 90 attractive companies are concentrated in the hands of bank trust departments, regulated investment companies and other financial institutions.1

Appendix 2 presents the details about the concentration of holdings by financial institutions within broad industry groups.

The relative and absolute size distribution of holdings of portfolio companies by the bank trust departments, by regulated investment companies and other institutional investors included in the sample is reported in this paper. A preliminary effort is made to show the extent to which such holdings may exist among all companies whose stock is traded on the organized exchanges and in the over-the-counter markets. Reasons for disclosure of such information are suggested, and the most generally useful places for such disclosure are named. One related and important issue considered is that of full and partial voting rights that bank trust departments have in securities that they hold.

DATA BASE

The basic data for this study were provided by the Securities and Exchange Commission. During the 1972 hearings

1 Although the sample used in this study covered 800 stocks, in only about 90 cases was the proportion of the stock held by the financial institutions as a group at about the 15 percent level or above. In order to keep the mass of detail within manageable bounds and to focus attention upon these instances in which portfolio concentration levels were high enough to be a matter of concern, only 90 (of the 800) companies included in the portfolios of the institutional investors were analyzed. (Of course, a part of the 800 companies are among the holdings of many individual investors.) A company held in the stock portfolio of an institutional investor is called a "portfolio company" for convenience.

on S. 448, before the Senate Subcommittee on Intergovernmental Relations,2 Senator Lee Metcalf and Chairman William J. Casey of the SEC discussed the inadequacy of the corporate ownership data published in the Institutional Investor Study Report of the Securities and Exchange Commission. During this interchange Chairman Casey agreed to furnish and did provide data showing the extent of the common stock holdings in almost 800 companies by: (a) the 50 largest bank trust departments, (b) the investment advisors for the 71 largest registered investment companies or complexes, (c) the 25 largest property and liability insurance groups, (d) the 26 largest life insurance companies and (e) other lesser institutional investors. These data are the basis for the new information presented and analyzed in the present study. The institutional investors are not identified by name, but the companies in which they hold stock are identified.

THE INSTITUTIONAL INVESTOR STUDY

STOCK SAMPLE

The sample of 793 common stocks used in the Institutional Investor Study (IIS) report is composed of 562 stocks listed on the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), and 231 traded nationally in the over-the-counter markets (OTC). The NYSE sample included the 27 stocks listed there with the largest market value and 198 drawn randomly, 100 from the AMEX and 150 from the OTC. The remaining 318 stocks were selected for specific reasons such as secondary studies.5 distributions or because they had been used in previous

THE SPECIAL SECURITIES AND EXCHANGE COMMISSION TABULATION

The first part of the special SEC tabulation, provided to Senator Metcalf by Chairman Casey, listed each stock in the portfolio of each of the financial institutions surveyed as of September 30, 1969, the date for which the data were

Regulatory Agency Budgets, Hearings before the Senate Subcommittee on Intergovernmental Relations of the Committee on Government Operations, 92nd Congress, 2d. sess., February 22 and 23 and May 17 and 25, 1972 (Washington, D.C.: Government Printing Office, 1972), pp. 443-456.

3 Institutional Investors Study (IIS) Report, the Securities and Exchange Commission (Washington, D.C.: Government Printing 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 securities that they manage. They act in various agency and fiduciary capacities for the beneficial owners of the stock they hold. In the case of the other financial institutions the term "ownership" may be used in its traditional sense. We hope that we have used the term holdings consistently throughout this paper to refer to the position of bank trust departments for the securities over which they have administrative and decision-making responsibilities.

IIS, vol. 3, pp. 1308-1309. Several stocks were eliminated from the sample for a variety of acceptable reasons which are described in this source. The basis for selecting the 800 stocks in the sample is discussed in this reference.

provided in the IIS report. Within these listings for each of the financial institutions, the specific portfolio companies were named but the institution (for example, bank trust departments) was not identified by name. The individual institutions by type were listed in rank order in terms of their average voting concentration percentage. In order to compute this average, the percentage of the outstanding stock held in each of the portfolio companies was totaled and divided by the number of different companies whose stock was held. In this way the bank trust department ranked as No. 1 need not be-and probably is not-the bank with the largest amount of trust department assets. The bank trust department ranked No. 1, for example, 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 organization of that type was ranked in terms of its average percentage of voting authority. In the case of banks the ranking was in terms of sole voting authority only; holdings in which the bank was authorized to exercise partial voting rights were reported by the SEC but are not included in this study.

The second part of the special SEC tabulation listed the portfolio companies included in the sample and presented separate tabulations for each of the types of institutions. Within the listing for each institutional investor group, such as bank trust departments, the portfolio companies were ranked in order of their total portfolio concentration percentage for that type of institution only. For example, the 50 bank trust departments held 32.925% of the outstanding stock of Emery Industries, which was the highest concentration percentage for any of the companies whose stock was held by the bank trust departments. The highest 9 portfolio concentration percentages for the stocks in the sample are tabulated below.

Within the second part of the special SEC tabulation, the holdings of each bank trust department, for example, were listed separately and ranked in order of their specific portfolio concentration ratio for individual companies. In the case of Emery Industries, Inc., the highest five individual concentration percentages by bank trust departments were as follows: 26.887, 4.420, 0.950, 0.307, and 0.203 percent. Cross references to the first part of the special SEC tabulation permitted identification of the

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This detailed information about the holdings of bank trust departments is, to my knowledge, unique. The 1968 Patman Committee study reported bank trust departments holdings down only to the 5 percent concentration level. At that time the staff of the Patman Committee was author learned at about that time that many large trust unable to obtain more detailed information. However, this departments had an informal rule against owning more summarized in Table 1 show the extent of portfolio conthan 5 percent of the stock of portfolio companies. Data centrations down to the 0.75 percent level for the sample level was reported by the SEC. companies, although the detail down to the 0.001 percent

The first part of Table 1 includes a summary of individual portfolio concentration percentages for the 50 bank Table 1 there were some 205 instances in which there were trust departments as of September 30, 1969. As shown in holdings of 1 percent or more and 167 holdings from 1 to 5 percent.

U.S. Congress, House Committee on Banking and Currency, Commercial Banks and Their Trust Activities; Emerging Influence on the American Economy, Staff Report for the Subcommittee on Domestic Finance, 90th Congress, 2d. sess., July 8, 1968 (Washington, 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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shares in the portfolio companies in the September 1969 sample. Some 205 instances or about 35 percent of the total were recorded for bank trust departments.

Appendix Table 1-A shows the details for the 50 stocks in which the 50 bank trust departments have the largest total portfolio concentration percentage. The concentration percentage for the 50th company is just under 15 percent.

These appendix tables list a'so the holdings of each of these 50 portfolio companies by the other financial institutions. The holdings of the regulated investment companies (which as a group constitute the second largest institutional owner of common stock) are shown separately. Their portfolio ratio rank is given also. There is a separate concentration rank for each portfolio company within each financial institution listing. Appendix Table 1-B lists the same type of data as Appendix Table 1-A for 40 companies in addition to those listed in Appendix Table 1-A. For example, 29.37 percent of Great Western Financial common stock is held by regulated investment companies; this percentage is the third highest concentration percentage among regulated investment companies. However the 50 bank trust departments held only 0.043 percent of this stock and it stood 595th out of 800 in the sample as far as bank investors were concerned.

These 40 additional companies are those for which the total portfolio concentration is 15 percent and above but which are not included in the bank trust department list. Table 1-B includes all of those portfolio companies in the sample for which the concentrations are above the 15 percent level held by regulated investment companies, except for the seven companies for which the bank trust departments held 15 percent or more. These seven companies were Northwest Airlines, Control Data Corp., Burroughs Corp., Connecticut General Insurance Co., Polaroid, National Airlines and Sperry Rand.

Totals as Estimated From Institutional Investor Study Sample

The 1969 IIS sample of 800 stocks was prepared in such a way as to make an estimate of the total number of instances of portfolio concentrations of 1 percent or above very hazardous. The estimates for the total number of portfolio concentrations at the 1 percent level are much better than educated guesses but they cannot be defended on the basis of sampling theory as that term is used in statistical theory.

Some scattered information will help form a reasonable estimate of the total number of instances in which individual institutional investors held 1 percent or more of outstanding shares of a portfolio company. At the end of 1969, 1,290 common stocks were listed on the NYSE but only 562 of these stocks were included in the sample. Perhaps only about one-half of the instances of individual 1 percent concentration levels were included in the IIS sample. However, the unusual way that the sample was drawn leaves such an inference open to challenge. The special tabulation prepared from the IIS data listed 48 instances in which the regulated investment companies as a group held 15 percent or more of individual portfolio companies as of September 30, 1969. At the end of 1971, Wiesenberger's Investment Companies-1972 listed 219 instances in which the concentration level, computed apparently in the same way, was 15 percent or above." This bit of information suggests that the sample may show Investment Companies-1972 (New York: Wiesenberger Services, Inc., 1972), p. 477.

only about one-fourth or one-fifth of the individual instances of 1 percent or above concentration levels for regulated investment companies.

Obviously more comprehensive studies of individual portfolio concentration levels are needed to establish their present and rapidly growing extent. Even though the present and growing magnitude of individual portfolio concentration levels are not yet well established, reasons for the importance of this subject and for regular public disclosure of these and other portfolio concentration data are becoming increasingly evident and widely discussed.

DESIRABILITY OF DISCLOSURE OF CON

CENTRATION ABOVE ONE PERCENT

At least eight important reasons for public disclosure of portfolio concentrations of 1 percent or above exist. The areas of concern, discussed briefly in this section, are: (1) Price effects of concentrated ownership;

(2) Liquidity effects of concentrated ownership; (3) Public right to know and so have ready access to such information;

(4) Extent of the portfolio concentration by individual financial institutions and by groups of institutions;

(5) Disclosure of portfolio concentration of several companies in same industry by one or a group of financial institutions;

(6) Special problems that might exist or develop in broadcasting and publishing industries;

(7) Uniformity of treatment of financial institutions; (8) Future growth of individual portfolio concentrations, and industry and overall concentration levels. point for public reporting will be discussed. The reasonableness of the 1 percent level as a threshold

1. Price Effects of Concentrated Holdings When a substantial proportion of the stock of a specific company is in the hands of one or a few institutional in very substantial price movements in the stock. Instituinvestors, the effect of either good or bad news may result tional investors seem to react as a group to a marked change-or even the rumor of a marked change in the outlook for a company or a group of companies in the same industry. Relatively large orders to buy or sell stocks may cause tension or even distress in the market for a specific stock. The liquidity and price effects of concentrated holdings are closely related.

2. Liquidity Effects of Concentrated Holdings

When a company is the subject of adverse news-even slightly adverse news- -the attempts of one or more institutions to sell some or all of their holdings often unbalances a market enough to cause the price of a specific stock to drop sharply. Organizations that may need to sell securities at such a juncture in order to obtain required funds are especially disadvantaged and may sustain large losses. These losses may cause severe damages to the institution (s) involved. A point to keep in mind is that institutional investors are investing "other people's money." Both individual and institutional investors might be able to avoid some of the liquidity pressure and losses if they knew who the other larger institutional

owners were.

ABSENCE OF INDIVIDUAL INVESTORS

In a recent speech Mr. G. Bradford Cook, formerly Chairman of the Securities and Exchange Commission,

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