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expressed his concern about the relative absence of individual investors and the lack of liquidity in the stock market. He said:

* without the orders of individual investors, the market lacks liquidity, a situation which leads institutions to concentrate on the "most liquid" stocks, those with the largest number of shares outstanding. Of course, this concentration reduces liquidity as well, resulting in sharp price movements when institutions buy or sell. These price swings and the steady decline in prices of smaller companies in themselves discourage the individual investor and further aggravates the situation.R

The 11S report makes the point that the liquidity of an entire portfolio may be overstated because individual institutions concentrate their security holdings. The trite but true statement that the IIS report repeats is, "If everyone tries to run for the door, nobody gets through."

3. Public Right To Know and To Have Ready Access to Such Information

The effort of the stock exchanges, scholars and others before the establishment of the SEC was in the direction of providing the general public, individual and institutional investors and government itself with more and better quality information about the performance of corporations whose stock was available to the public.10

8 G. Bradford Cook, "Democracy in the Markets," speech given before the Economic Club of Chicago, The Palmer House, Chicago, April 25, 1973.

IIS, vol. 3, pp. 1317-1318. The liquidity problem is discussed at length at several points in the IIS report.

10 For a brief history and numerous references to this extensive literature, see Robert M. Soldofsky, Institutional Ownership of Common Stock, 1900-2000 (Ann Arbor, Michigan: Bureau of Business Research, Graduate School of Business Administration, University of Michigan, 1971).

Information concerning concentrated holdings of common stock would be useful to the maintenance of orderly price developments in the stock markets and would help both institutions and individuals plan more rationally to meet their liquidity and income needs.

Information Sources

Most of the information that is needed about concentrated holdings, with one outstanding exception, is already available.

(a) The stock holdings of each mutual fund are published regularly in Vickers Directory of Investment Companies. One section of Vickers' service lists alphabetically each common stock held by mutual funds, names each mutual fund holding that stock and the number of shares held by that fund. These data are prepared quarterly.

(b) The common stock held by life insurance companies and property and casualty insurance companies are listed alphabetically in Corporate Holdings of Insurance Companies, Volume I, published annually by the United Statistical Associates of New York City. The holdings of each insurance company are listed in an easily readable form. (c) The stock portfolios of state and local pension funds, foundations, and university endowment funds are made available to anyone who has a legitimate reason to want to know what they own and has the time, energy and money to write to each of several hundred organizations. Bank Reporting Inadequate

(d) The only financial institutions not providing complete information routinely about the common stocks that they hold are the trust departments of the commercial banks.

The importance of this absence of information from the trust department of commercial banks may be inferred from Table 2 which shows the value of common stocks held by the major financial institutions.

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Trust Assets of Insured Commercial Banks-1971 (Washington, D.C.: Board of Governors of Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, 1972). Table 5A, p. 14. Other annual issues used also. Total includes other assets in addition to stocks.

Robert M. Soldofsky, Institutional Holdings of Common Stock: 1900-2000 (Ann Arbor, Mich.: Bureau of Business Research, Graduate School of Business, University of Michigan, 1971), pp. 161, 185, 186. See statement of sources for these references for further

214. 5

. 221. 5 253. 3

3 282. 7 $ 280. 1 3 292. 2

Total market

value of stocks 3

4 150. 6

309. 5

4 421. 2 4674. 7 587. 3

• 707. 8 4761. 3

942. 0

• 1220. 0

detail. At the end of 1968 the stock holdings of university and college endowments were $9,000,000,000, foundations, $15,800,000,000 and common trust funds were $4,400,000,000. Institutions held 23.3 percent of the (unduplicated) total of $761,300,000,000 of the market value of common stock trade in the United States at the end of 1968. Soldofsky, op. cit., p. 209.

IIS Vol. 1, table III-24, p. 109.

Mutual Fund Fact Book-1972 (Washington, D.C.: The Ixvestment Company Institute, 1972), p. 24. For 1967 through 1971 common stock held by closed-end investment companies is not included. Total assets of closed-end investment companies increased from $2,900,000,000 in 1968 to $4,300,000,000 for 1971. Ibid., p. 4.

Table 3.-ASSETS OF 10 LARGEST BANK TRUST DEPARTMENTS (1967 AND 1971)

[Dollar amounts in billions]

Bank name

Morgan Guaranty Trust Co. (New York City)....

Bankers Trust Co. (New York City)

Chase Manhattan Bank (New York City).

First National City Bank (New York City).

United States Trust Co. (New York City).

Manufacturers Hanover Trust Co. (New York City).

Mellon National Bank (Pittsburgh)

Continental Illinois National Bank (Chicago).
First National Bank of Chicago (Chicago).
Chemical Bank (New York City)....

Source: U.S. Congress, House Committee on Banking and Currency, Commercial Banks and Their Trust Activities-Emerging Influences on the American Economy, vol. 1, staff report for the Subcommittee on Domestic Finance, 90th Cong., 2d sess., July 8, 1968 (Washington, D.C.: Government Printing Office, 1968).

The total value of common stocks held by the trust departments of commercial banks was singularly difficult to locate. Evidently some of these estimates included in the IIS report were specially prepared by the Office of the Comptroller of the Currency for that study."

The bank trust department assets for the individual banks having the largest amount of assets at the end of 1967 and 1971 are shown in Table 3.

The market value of the common stock portion of these assets for 1967 is available. The 1967 data were obtained by the House Committee on Banking and Currency and published in its 1968 study, Commercial Banks and Their Trust Activities, Emerging Influence on the American Economy (90th Congress, 2nd Session). No earlier data on common stock holdings could be located.

These total assets and common stock magnitudes may be compared with those of the 10 largest mutual fund complexes, as shown in Table 4.

Table 4.-ASSETS OF 10 LARGEST MUTUAL FUND
COMPLEXES (DEC. 31, 1968) 1

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The term "mutual fund complex" refers to a group of two or more mutual funds run by a single management group. This fact is very important for later developments in this report because the management group votes all of the stock held by the several funds that it manages. Each of the individual funds in a mutual fund complex may invest up to 5 percent of its assets in the stock of an individual portfolio company and own up to 10 percent of the outstanding shares of each portfolio company.

Two additional observations with respect to bank trust departments should be kept in mind. Their total assets have been growing at 7 percent per year from 1965 through 1971, but their common stock holdings have grown at a considerably faster rate. The assets of the next largest owners of common stock, the regulated investment Amount companies, have declined since 1968.

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1 Robert M. Soldofsky, Institutional Holdings of Common Stock: 1900-2000 (Ann Arbor, Michigan: Bureau of Business Research, Graduate School of Business, University of Michigan, 1971), pp. 165-167.

11 IIS, vol. 1, table III-24, p. 109.

A separate study using 1971 data for the nine largest New York City banks showed that trust departments' earnings provided 7.7 percent of the aggregate operating revenues. In 1970 they accounted for 6.5 percent of the aggregate operating revenues.13

Adequate data for the common stock holdings of all major financial institutions with the exception of bank trust departments are available but much of it is not in

12 Trust Assets of Insured Commercial Banks (Washington, D.C.: Federal Deposit Insurance Company, 1972), pp. 68 and 69. Prepared jointly by the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency.

13 Edna E. Ehrlich, "The Functions and Investment Policies of Personal Trust Departments-Part II," Monthly Review, Federal Reserve Bank of New York, January 1973, pp. 12-15. This article includes some additional information about trust department earnings and the problems in making such computations.

29-553 - 74 - 11

convenient form and it is not readily accessible to most persons and financial institutions. The convenience and accessibility of these data would be improved if they were published in corporate annual reports and also placed on file at a national repository which serves all of the people. The Library of Congress is such a national repository.

NUMEROUS USES FOR DATA

The data for institutional holdings above the 1 percent level maintained at the Library of Congress would have numerous uses. For example, they could be used by Federal regulatory agencies that need to have such information to expedite the administration of parts of the laws under which they operate. Such data could be used as a cross-check against other sources of ownership data. Information could be stored in modern electronic data banks and be made available in whatever form the user desires. The holdings of one or several institutions in the stock of a specific group of companies could be called out by a small adjustment in an existing computer program. The data would be available quickly and inexpensively to individual scholars and to research institutes.

Self-Dealing and Conflicts of Interest Related to Nondisclosure Several cases related to self-dealing and conflicts of interest related to commercial banks have come to public attention during the past few years.

First a financial institution might purchase the stock in a company to which it has made a loan or make a loan to a company whose stock it had previously purchased. There is always the problem of potential self-dealing in such a situation. In March, 1973 the Airline Pilots Association (ALPA) brought suit against the Continental Illinois National Bank and Trust Company of Chicago, which administered ALPA's pension fund. ALPA's pension fund lost about $7 million in five stocks purchased for it by Continental Illinois. The bank's commercial loan department had made large loans to each of these five companies. ALPA had no prior knowledge of these loans as required by their agreement with the bank. The facts alleged by ALPA in its suit raise very serious questions about the prudence of the bank in its purchase of several of these stocks for an employee benefit fund.

Publication of more information about the activities of financial institutions and/or some changes in the organizational structure of parts of the "finance industry" may be necessary to reduce the frequency of questionable if not illegal-practices such mentioned.

as those that are here

INTERLOCKING DIRECTORS

Second, banks have directors on the boards of companies in which their trust departments hold substantial amounts of stock. For example, Morgan Guaranty had 16 officers who were directors of nonfinancial corporations as follows: 14

14 Mark J. Green, ed. The Closed Enterprise System (Washington, D.C.: Center for the Study of Responsive Law. 1971), Nader Study Group Report on Antitrust Enforcement.

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Third, commercial banks may get special, advance information about the performance of companies with whom they have banking relations. Such information may be utilized by their trust departments also and work against the interests of other investors. For example, Chase Manhattan Bank sold almost 300,000 shares of Penn Central stock very shortly before the news of Penn Central's financial difficulties became public. Other banks may have sold early also. Several banks including Morgan Guaranty, Chemical Bank, Bankers Trust and others apparently became aware of the difficulties of Equity Funding Corporation before other investors did and acted on the basis of that information.15

Antitrust Example Related to Nondisclosure

The Department of Justice filed suit on March 28, 1970 against the Cleveland Trust Company. The complaint charged that the Cleveland Trust Company owned a substantial proportion of the voting stock in four competing machine tool companies, in violation of Sections 7 and 8 of the Clayton Act. The bank had a director on the board of each of these firms, engaged in various banking activities with each of the four firms, and held stock ranging from 2 to 27 percent in these same companies.16

4. Extent of Portfolio Concentration by Individual Financial Institutions and Groups of Institutions

The extent to which institutional investors as a group owned individual portfolio companies was not publicly holdings of bank trust departments by the Patman Comknown until some information was published about the mittee in 1968. As noted, that study was limited because ownership of less than 5 percent by an individual bank trust department was not reported. Even so, an earlier study that used this information showed that over 40 percent of the outstanding shares of 2 corporations (46 percent of Northwest Airlines and 40.1 percent of Trans World Airlines) 30 to 40 percent of the shares of another 8 corporations and 20 to 30 percent of 40 additional corporations were held by institutional investors.17

Our summary of the special study prepared from the IIS report 800-stock sample, which is shown as Table 5,

15 Business Week, April 14, 1973, pp. 80-86.

16 Herbert Bratten, "Justice Sues Cleveland Trust," Banking, June 1970, pp. 50 and 104. 17 Soldofsky, op. cit., pp. 214-215.

lists four portfolio concentrations above the 40 percent
level and 37 more at the 30-40 percent level. In the
cases of Emery Industries and General Reinsurance, 12
bank trust departments alone controlled a total of more
than 30 percent of the stock of each company.

Table 5.-PORTFOLIO CONCENTRATIONS FOR 90 COMPANIES
LISTED IN APPENDIX TABLES 1-2 AND I-B

All insti

investors in sample

banks and insurance portfolio companies also have other crucial financial relationships with the companies in which they invest, relationships such as buying bonds, making short-term loans, helping to negotiate mergers or providing insurance coverage.

Table 5 summarizes the extent to which the common stocks in the IIS special tabulation were held by 4, 8, and 12 organizations holding the largest blocks of such stock. In 18 instances, 20 percent or more of the outstanding shares were held by four organizations. In five tutional instances, four bank trust departments alone held 20 percent or more of the outstanding stock of individual companies. When the 8 and 12 largest holders are included, the extent and proportion of concentrated portfolio control rise rapidly as shown in Table 5. The number of instances of concentrated holdings that found their way into the sample may be only one-half to onefourth of what may have existed in 1969. The details of these instances of concentrated ownership on a companyby-company basis are included in Appendix Tables 1-A and 1-B. An earlier study of such portfolio concentration for regulated investment companies only is shown as Appendix Table 1-C.

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1 These are the 4, 8, or 12 holders irrespective of the type of institutions. For example, the 4 largest holders may include 2 bank trust departments and 2 mutual fund complexes.

NOTES.-These concentration percentages are for only those stocks in the 800-stock sample which had concentration ratios above 10 percent. If all stock in the sample would have been used the frequency of concentration percentages would have continued to rise at least into the 15.0-19.9 percent classification in part I.

Part I of Table 5 shows that the frequency of portfolio concentration percentages is highest in the 20.0 to 24.9 percent range and drops in the 15.0 to 19.9 percent range. There are at least two reasons for this result. First, only stocks with portfolio concentration ratios of 10 percent or more were used in this summary. Second, only 800 stocks were included in the IIS study. If all widely-traded stocks had been included, the frequency of portfolio concentration ratio levels would very probably have peaked at a lower range.

Inter-Related Financial Dealings

Very widespread ownership of common stock among several thousand institutional investors would not signal as much potential danger or abuse of potential power as the concentration of ownership in the hands of a limited number of owners. The fiction of voting power over corporate activities that has been accepted by society is being challenged as voting power comes increasingly into the hands of institutional investors who are acting as intermediaries for the ultimate beneficiaries of the stock.

Inter-Related Financial Dealings

The problem of the legitimacy of voting control in corporate matters is further intensified when commercial

PRESUMPTION OF CONTROL

Far-reaching policy questions are raised by such_portfolio concentrations as were shown to exist already. Sometimes the ownership of 10 percent of a company's outstanding stock is presumed to represent effective control of the company but a 20 percent interest would be generally conceded to represent control. This problem of control was discussed at length in the hearings preceding the adoption of the Investment Company Act of 1940. Two issues discussed in the hearings were the extent of the ownership of a portfolio company that might be proper and judicious, and the problem of whether the portfolio concentration limitation being considered should apply to individual investment funds or investment fund complexes.

The original draft of the Investment Company Act of 1940 included a 5 percent portfolio concentration limit. Massachusetts Investors Trust and Hugh Bullock of A number of industry leaders, such as Merrill Griswold of Calvin Bullock, were quite willing to accept the 5 percent McGrath of General American Investors argued for a 10 portfolio concentration limit. Others such as Raymond D. percent portfolio concentration limit as being consistent with the dividing line between casual investment and an investment tinged with the power of control.18

NO INVESTMENT COMPANY COMPLEX PROVISION

S. 3580 (76th Congress, 3rd Session), the original draft of the Investment Company Act of 1940, did not include a provision relating to investment company complexes but the subject was discussed at length. Mr. Griswold said at the 1940 hearings:

If it is feared that a group of open-end trusts under the same management might conceivably obtain control of other corporations through their combined holdings . . . any such possibility can easily be prevented without arbitrarily limiting even the size of the group. For instance, (1) a maximum could be placed on the percentage of ownership in any corporation that can be held by any group of companies under the same manage

18 For an examination of this debate see Soldofsky, op. cit., pp. 11-19.

ment, or (2) an individual director could be prevented from serving on all the boards of investment trusts which between them controlled more than a specified percentage of stock of any corporation.19

Mr. Hugh Bullock addressed the same topic:

I have heard of one other highly theoretical objection, to wit, that if the same group managed several investment companies, they might have too much influence over some companies whose shares were included in all trusts' portfolios. For example, assume that 10 trusts managed by the same people, each owned 5 percent of the corporation's stock. This group would then control the portfolio company.

20

Sharp Increase in Concentration

What may have been "highly theoretical" in 1940 was approaching uncomfortably close to realization in a modified form in 1970. Remember that in 1940 all types of investment companies held only $1.8 billion worth of stock. By 1955 the amount had increased only to $6.4 billion, but it soared to $60 billion by 1971.

NONINSURED PENSION FUNDS

In 1940 the stock held by noninsured corporate pension funds was worth about $100 million. These noninsured corporate pension funds did not begin their very rapid expansion until they were energized by the combination of the special provisions for employee benefit plans included in the Internal Revenue Code of 1942, the high income tax rates of World War II, and the Inland Steel decision made by the Supreme Court in 1949. This decision upheld the duty under the Labor Management Relations Act of 1947 for employers to bargain collectively with employees on pension benefits.

The extent of portfolio concentration in the hands of mutual funds argues for some substantial modification of the rules included in the Investment Company Act of 1940. At the very least consideration should be given to application of the 10 percent portfolio concentration provision to investment company complexes, rather than to individual investment companies. Consideration might be given also to reducing the 10 percent concentration level, at least under some circumstances.

NO CONCENTRATION LIMITS FOR TRUST DEPARTMENTS

There are generally no portfolio concentration limits established regarding the common stocks held by trust departments. One exception to that is for common trust funds (pooled assets from small estates and trusts) administered by these banks." The total of these funds is well under 3 percent of the stocks held by trust departments. The very rapid recent and continuing growth of trust department stock holdings would seem to call for

19 Ibid., p. 18. The original Senate bill included a provision to limit the size of a diversified investment company to $150,000,000. 20 Ibid.

21 The regulations of the Comptroller of the Currency limit common trust funds to an investment of not more than 10 percent of the funds assets in any one security and not more than 10 percent of the market value of the company. IIS, vol. 2, p. 445. At the end of 1968 the common trust funds of commercial banks were $9.55 billion which was less than 4 percent of all bank trust department assets. About 48 percent of these common trust fund assets were invested in common stock. IIS, vol. 1, p. 111.

Congressional consideration and, possibly, regulation of their portfolio concentrations. In view of the relative size and growth rates of mutual funds and the stocks held by bank trust departments, the rather surprising point is that such legislation has not been enacted already.

Level of Presumptive Control

The problem of the identification of corporate control has become more sharply focused in recent years. As remarked earlier, effective control was deemed to exist when ownership of common stock reached the range of 10 to 20 percent. The 20 percent level is used in the alien control ownership sections of the Communications Act of 1934 as amended. The 10 percent standard was used in the Public Utility Holding Company Act of 1935 as well as in the Investment Company Act of 1940. The 10 percent standard is also included in the Federal Deposit Insurance Company Act of 1933 as amended.

CORPORATE TAKEOVER ACT

The original Securities Act of 1934 established 10 percent as the standard for reporting on insider activities and possible corporate takeovers. The Corporate Takeover Act, which was passed in December, 1970, lowered the ownership level above which reports must be filed to 5 percent. The Bank Holding Company Act of 1970 indicated 5 percent as the level for presumptive ownership, but it does provide for further inquiry into each case. These standards set in the 1930's and 1940's have been reconsidered for the ownership of air carrier and broadcasting and television stations, including networks. On October 25, 1972, the Civil Aeronautics Board (CAB) amended its regulations to require any person owning 5 percent or more of an air carrier to report that fact to the CAB. A presumption of ownership is made if any person owns 10 percent or more of an airline stock. A person who acquires such control must receive permission or exemption from the CAB. The 10 percent level is not a ceiling on ownership, but it is expected to result in an application for either approval or exemption from the presumption of control.

APPLIES TO INDIVIDUAL MUTUAL FUND

The 10 percent level is interpreted under present regulations as applying to an individual mutual fund but a change in CAB regulations to apply the 10 percent level to mutual fund complexes is likely to be considered.

Presumably there would be no limitation upon a bank trust department holding 10 percent or more of the stock of the two air carriers, but the CAB would be unlikely to permit such common ownership by a single person, according to the CAB staff.22

FCC Eased Rule for Banks

The Federal Communications Commission prohibits ownership of two TV, FM or AM radio stations which serve the same area. However, the FCC permits an owner to control seven AM, seven FM and seven TV stations, provided that no more than five of the TV stations are VHF. Additional broadcast company holdings were, until last year, limited to 1 percent for banks or individuals

22 Letter from Burton S. Kolko, Chief, Agreements Division, Bureau of Operating Rights, Civil Aeronautics Board, dated May 31, 1973. Civil Aeronautics Board, Regulation ER-780, Part 245, Reports of Ownership Stock and Other Interests, mimeographed, adopted October 25, 1973.

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