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expressed his concern about the relative absence of Information concerning concentrated holdings of common individual investors and the lack of liquidity in the stock stock would be useful to the maintenance of orderly price market. He said:
developments in the stock markets and would help both * * * without the orders of individual investors,
institutions and individuals plan more rationally to meet the market lacks liquidity, a situation which leads their liquidity and income needs. institutions to concentrate on the “most liquid” stocks, those with the largest number of shares Information Sources outstanding. Of course, this concentration reduces liquidity as well, resulting in sharp price
Most of the information that is needed about concenmovements when institutions buy or sell. These trated holdings, with one outstanding exception, is already price swings and the steady decline in prices of available. smaller companies in themselves discourage the (a) The stock holdings of each mutual fund are published individual investor and further aggravates the regularly in Vickers Directory of Investment Companies. situation.8
One section of Vickers' service lists alphabetically each The Ils report makes the point that the liquidity of
common stock held by mutual funds, names each mutual an entire portfolio may be overstated because individual
fund holding that stock and the number of shares held by institutions concentrate their security holdings. The
that fund. These data are prepared quarterly. trite but true statement that the IIS report repeats is, (b) The common stock held by life insurance companies "If everyone tries to run for the door, nobody gets and property and casualty insurance companies are listed
alphabetically in Corporate Holdings of Insurance Com
panies, Volume I, published annually by the United Sta3. Public Right To Know and To Have Ready Access to tistical Associates of New York City. The holdings of each Such Information
insurance company are listed in an easily readable form.
(c) The stock portfolios of state and local pension funds, The effort of the stock exchanges, scholars and others foundations, and university endowment funds are made before the establishment of the SEC was in the direction available to anyone who has a legitimate reason to want of providing the general public, individual and institu- to know what they own and has the time, energy and tional investors and government itself with more and money to write to each of several hundred organizations. better quality information about the perforinance of corporations whose stock was available to the public. 10
Bank Reporting Inadequate & G. Bradford Cook, “Democracy in the Markets," speech given before the Economic Club of Chicago, The Palmer House, Chicago, (d) The only financial institutions not providing complete April 25, 1973.
information routinely about the common stocks that they SIIS, vol. 3, pp. 1317–1318. The liquidity problem is discussed at length at several points in the IIS report.
hold are the trust departments of the commercial banks. 10 For a brief history and numerous references to this extensive The importance of this absence of information from the literature, see Robert M. Soldofsky, Institutional Ownership of trust department of commercial banks may be inferred Common Stock, 1900-2000 (Ann Arbor, Michigan: Bureau of Busi
from Table 2 which shows the value of common stocks ness Research, Graduate School of Business Administration, University of Michigan, 1971).
held by the major financial institutions.
Table 2.–STOCKS HELD BY MAJOR FINANCIAL INSTITUTIONS?
(Dollar amounts in billions]
Bank trust departments
Regulated investment companies
State and local pension
Total market value of stocks 3
1950. 1955. 1960. 1965. 1966. 1967. 1968. 1969. 1970. 1971. 1972
* 5. 7
• 9.0 • 12. 5
* 150. 6 + 309. 5 + 421. 2 4 674. 7 • 587. 3 • 707. 8 • 761. 3
• 214. 5
3 182. 7
3 5. 5
1 39. 6
6942. O 6 1220. O
i Investment Outlook (New York: Salomon Brothers, 1971 and 1972 editions).
Statistical Bulletin S.E.C. Apr. 4, 1973. Amounts stated at book value.
* 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
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 fror$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)
Source: U.S. Congress, House Committee on Banking and * Source: Trust Asset of Insured Commercial Banks (Washington, Currency, Commercial Banks and Their Trust Aawities—Emerging D.C.: Federal Deposit Insurance Corporation, 1971) pp. 68 and 69 Influences on the American Economy, vol. 1, staff report for the Prepared jointly by the Board of Governors of the Federal Reserve Subcommittee on Domestic Finance, 90th Cong., 2d sess., July 8, System, Federal Deposit Insurance Corporation, and Office of the 1968 (Washington, D.C.: Government Printing Office, 1968). Comptroller of the Currency.
The total value of common stocks held by the trust The obvious purpose of this comparison is to provide a departments of commercial banks was singularly difficult view of the relative size of the total assets of these two to locate. Evidently some of these estimates included in major financial institutions. At the end of 1971 the trust the I1S report were specially prepared by the Office of the departments of 34 commercial banks each had assets of Comptroller of the Currency for that study.!!
$2 billion or more. Most major bank trust departments The bank trust department assets for the individual held more than half of their assets in stocks so that one banks having the largest amount of assets at the end of may safely infer that each of these 34 bank trust depart1967 and 1971 are shown in Table 3.
ments held more than $1 billion in stocks. The market value of the common stock portion of these assets for 1967 is available. The 1967 data were obtained
MUTUAL FUND COMPLEX by the House Committee on Banking and Currency and published in its 1968 study, Commercial Banks and Their The term “mutual fund complex” refers to a group of Trust Activities, Emerging Influence on the American two or more mutual funds run by a single management Economy (90th Congress, 2nd Session). No earlier data group. This fact is very important for later developments on common stock holdings could be located.
in this report because the management group votes all of These total assets and common stock magnitudes may the stock held by the several funds that it manages. Each be compared with those of the 10 largest mutual fund of the individual funds in a mutual fund complex may complexes, as shown in Table 4.
invest up to 5 percent of its assets in the stock of an
individual portfolio company and own up to 10 percent Table 4.-ASSETS OF 10 LARGEST MUTUAL FUND of the outstanding shares of each portfolio company. COMPLEXES (DEC. 31, 1968) *
Two additional observations with respect to bank trust
departments should be kept in mind. Their total assets (Dollar amounts in billions]
have been growing at 7 percent per year from 1965
through 1971, but their common stock holdings have Number of funds
grown at a considerably faster rate. The assets of the next in complex
largest owners of common stock, the regulated investment 1968 Amount companies, have declined since 1968.
A separate study using 1971 data for the nine largest Investors Diversified Services..
New York City banks showed that trust departments' Massachusetts Investment Trust
earnings provided 7.7 percent of the aggregate operating Group
3. 6 Fidelity Management & Research
revenues. In 1970 they accounted for 6.5 percent of the Co..
4. 1 aggregate operating revenues. 18 Waddell & Reed, Inc.
2. 8 Adequate data for the common stock holdings of all Wellington Management Co..
major financial institutions with the exception of bank Investors Management Co.--.
2. 3 Union Service Corp...
trust departments are available but much of it is not in Lord, Abbott & Co.
13 Trust Assets of Insured Commercial Banks (Washington, D.C.: Keystone Custodian Funds.
2.0 Putnam Management Fund..
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 · Robert M. Soldofsky, Institutional Holdings of Common Stock: Comptroller of the Currency. 1900-2000 (Ann Arbor, Michigan: Bureau of Business Research, 13 Edna E. Ehrlich, “The Functions and Investment Policies of Graduate School of Business, University of Michigan, 1971), pp. Personal Trust Departments - Part II,” Monthly Review, Federal 165-167.
Reserve Bank of New York, January 1973, pp. 12-15. This article
includes some additional information about trust department earnU 118, vol. 1, table III-24, p. 109.
ings and the problems in making such computations.
29-553 O - 74 - 11
NUMEROUS USES FOR DATA
1 1 1 1 1
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 lile at a national repository which serves all of the people.
Ford Motor Co..
Boeing Company -
Merck & Co.
Smith, Kline & French level maintained at the Library of Congress would have Meade Johnson. numerous uses. For example, they could be used by Fed- American Airlines. eral regulatory agencies that need to have such informa- Dow Jones Co. tion to expedite the administration of parts of the laws
Harcourt, Brace & World.
John Wiley & Sons... under which they operate. Such data could be used as a cross-check against other sources of ownership data.
Third, commercial banks may get special, advance Information could be stored in modern electronic data information about the performance of companies with banks and be made available in whatever form the user
whom they have banking relations. Such information may desires. The holdings of one or several institutions in the be utilized by their trust departments also and work stock of a specific group of companies could be called out against the interests of other investors. For example, by a small adjustment in an existing computer program. Chase Manhattan Bank sold almost 300,000 shares of The data would be available quickly and inexpensively to Penn Central stock very shortly before the news of Penn individual scholars and to research institutes.
Central's financial difficulties became public. Other banks
may have sold early also. Several banks including Morgan Self-Dealing and Conflicts of Interest Related to Nondisclosure Guaranty, Chemical Bank, Bankers Trust and others
apparently became aware of the difficulties of Equity Several cases related to self-dealing and conflicts of Funding Corporation before other investors did and acted interest related to commercial banks have come to public on the basis of that information.15 attention during the past few years.
First a financial institution might purchase the stock in Antitrust Example Related to Nondisclosure a company to which it has made a loan or make a loan to
The Department of Justice filed suit on March 28, 1970 a company whose stock it had previously purchased. against the Cleveland Trust Company. The complaint There is always the problem of potential self-dealing in charged that the Cleveland Trust Company owned a such a situation. In March, 1973 'the Airline Pilots Asso- substantial proportion of the voting stock in four competciation (ALPA) brought suit against the Continental ing machine tool companies, in violation of Sections 7 Illinois National Bank and Trust Company of Chicago, and 8 of the Clayton Act. The bank had a director on which administered ALPA's pension fund. ALPA's pension the board of each of these firms, engaged in various fund lost about $7 million in five stocks purchased for it banking activities with each of the four firms, and held by Continental Illinois. The bank's commercial loan de- stock ranging from 2 to 27 percent in these same partment had made large loans to each of these five
companies. companies. ALPA had no prior knowledge of these loans as required by their agreement with the bank. The facts 4. Extent of Portfolio Concentration by Individual alleged by ALPA in its suit raise very serious questions Financial Institutions and Groups of Institutions about the prudence of the bank in its purchase of several
The extent to which institutional investors as a group of these stocks for an employee benefit fund.
owned individual portfolio companies was not publicly Publication of more information about the activities of financial institutions and/or some changes in the organi- holdings of bank trust departments by the Patman Com
known until some information was published about the zational structure of parts of the "finance industry” may mittee in 1968. As noted, that study was limited because be necessary to reduce the frequency of questionable--if not illegal-practices such as those that are here ownership of less than 5 percent by an individual bank mentioned.
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 INTERLOCKING DIRECTORS
percent of Northwest Airlines and 40.1 percent of Trans Second, banks have directors on the boards of companies & corporations and 20 to 30 percent of 40 additional
World Airlines) 30 to 40 percent of the shares of another in which their trust departments hold substantial amounts of stock. For example, Morgan Guaranty had 16 offi- corporations were held by institutional investors. 17 cers who were directors of nonfinancial corporations as
Our summary of the special study prepared from the follows: 14
IIS report 800-stock sample, which is shown as Table 5,
15 Business Week, April 14, 1973, pp. 80-86. 14 Mark J. Green, ed. The Closed Enterprise System (Washington, 16 Herbert Bratten, "Justice Sues Cleveland Trust," Banking, D.C.: Center for the Study of Responsive Law. 1971), Nader June 1970, pp. 50 and 104. Study Group Report on Antitrust Enforcement.
17 Soldofsky, op. cit., pp. 214-215.
lists four portfolio concentrations above the 40 percent banks and insurance portfolio companies also have other level and 37 more at the 30-40 percent level. In the crucial financial relationships with the companies in which cases of Emery Industries and General Reinsurance, 12 they invest, relationships such as buying bonds, making bank trust departments alone controlled a total of more short-term loans, helping to negotiate mergers or providing than 30 percent of the stock of each company.
Table 5 summarizes the extent to which the common Table 5.-PORTFOLIO CONCENTRATIONS FOR 90 COMPANIES stocks in the IIS special tabulation were held by 4, LISTED IN APPENDIX TABLES 1-2 AND I-B
8, and 12 organizations holding the largest blocks of
such stock. In 18 instances, 20 percent or more of the out
All insti- standing shares were held by four organizations. In five 4 largest 8 largest 12 largest tutional instances, four bank trust departments alone held 20 Portfolio concentra- holders holders holders investors percent or more of the outstanding stock of individual tion percentage
companies. When the 8 and 12 largest holders are
included, the extent and proportion of concentrated Part 1-All institutional investors:
portfolio control rise rapidly as shown in Table 5. The 40.0 and up.
number of instances of concentrated holdings that found 35.0 to 39.9
15 30.0 to 34.9
their way into the sample may be only one-half to one25.0 to 29.9.
17 fourth of what may have existed in 1969. The details of 20.0 to 24.9.
20 these instances of concentrated ownership on a company15.0 to 19.9.
by-company basis are included in Appendix Tables 1-A 10.0 to 14.9.
5 9.9 or less.
and 1-B. An earlier study of such portfolio concentration
for regulated investment companies only is shown as Total...
Appendix Table 1-C. Part II—Bank trust departments only: 40.0 and up
PRESUMPTION OF CONTROL 35.0 to 39.9
11 30.0 to 34.9.
13 Far-reaching policy questions are raised by such port25.0 to 29.9.
folio concentrations as were shown to exist already. Some20.0 to 24.9.
7 15.0 to 19.9.
5 times the ownership of 10 percent of a company's out10.0 to 14.9.
standing stock is presumed to represent effective control 9.9 or less.
of the company but a 20 percent interest would be gen
erally conceded to represent control. This problem of Total.
control was discussed at length in the hearings preceding
the adoption of the Investment Company Act of 1940. 1 These are the 4, 8, or 12 holders irrespective of the type of
Two issues discussed in the hearings were the extent of institutions. For example, the 4 largest holders may include 2 bank
the ownership of a portfolio company that might be proper trust departments and 2 mutual fund complexes.
and judicious, and the problem of whether the portfolio NOTE8.—These concentration percentages are for only those stocks in the 800-stock sample which had concentration ratios above
concentration limitation being considered should apply to 10 percent. If all stock in the sample would have been used the individual investment funds or investment fund complexes. frequency of concentration percentages would have continued to The original draft of the Investment Company Act of rise at least into the 15.0–19.9 percent classification in part I.
1940 included a 5 percent portfolio concentration limit. Part I of Table 5 shows that the frequency of portfolio Massachusetts Investors Trust and Hugh Bullock of
A number of industry leaders, such as Merrill Griswold of concentration percentages is highest in the 20.0 to 24.9
Calvin Bullock, were quite willing to accept the 5 percent percent range and drops in the 15.0 to 19.9 percent range. There are at least two reasons for this result. First, only McGrath of General American Investors argued for a 10
portfolio concentration limit. Others such as Raymond D. stocks with portfolio concentration ratios of 10 percent percent portfolio concentration limit as being consistent or more were used in this summary. Second, only 800 stocks were included in the IIS study. If all widely-traded investment tinged with the power of control.18
with the dividing line between casual investment and an stocks had been included, the frequency of portfolio concentration ratio levels would very probably have peaked
NO INVESTMENT COMPANY COMPLEX PROVISION at a lower range. Inter-Related Financial Dealings
S. 3580 (76th Congress, 3rd Session), the original draft of
the Investment Company Act of 1940, did not include a Very widespread ownership of common stock among
provision relating to investment company complexes but several thousand institutional investors would not signal the 1940 hearings:
the subject was discussed at length. Mr. Griswold said at as much potential danger or abuse of potential power as the concentration of ownership in the hands of a limited If it is feared that a group of open-end trusts number of owners. The fiction of voting power over under the same management might conceivably corporate activities that has been accepted by society is obtain control of other corporations through their being challenged as voting power comes increasingly into combined holdings . . . any such possibility can the hands of institutional investors who are acting as easily be prevented without arbitrarily limiting intermediaries for the ultimate beneficiaries of the stock. even the size of the group. For instance, (1) a
maximum could be placed on the percentage of Inter-Related Financial Dealings
ownership in any corporation that can be held by
any group of companies under the same manageThe problem of the legitimacy of voting control in
18 For an examination of this debate see Soldofsky, op. cit., corporate matters is further intensified when commercial
ment, or (2) an individual director could be pre- Congressional consideration and, possibly, regulation of vented from serving on all the boards of invest- their portfolio concentrations. In view of the relative ment trusts which between them controlled more size and growth rates of mutual funds and the stocks held than a specified percentage of stock of any by bank trust departments, the rather surprising point is corporation."
that such legislation has not been enacted already. Mr. Hugh Bullock addressed the same topic:
Level of Presumptive Control I have heard of one other highly theoretical objection, to wit, that if the same group managed sev- The problem of the identification of corporate control eral investment companies, they might have too
has become more sharply focused in recent years. As much influence over some companies whose shares remarked earlier, effective control was deemed to exist were included in all trusts' portfolios. For ex- when ownership of common stock reached the range of 10 ample, assume that 10 trusts managed by the same people, each owned 5 percent of the cor
to 20 percent. The 20 percent level is used in the alien
control ownership sections of the Communications Act poration's stock. This group would then control
of 1934 as amended. The 10 percent standard was used the portfolio company."
in the Public Utility Holding Company Act of 1935 as well
as in the Investment Company Act of 1940. The 10 perSharp Increase in Concentration
cent standard is also included in the Federal Deposit
Insurance Company Act of 1933 as amended. What may have been "highly theoretical” in 1940 was approaching uncomfortably close to realization in a
CORPORATE TAKEOVER ACT modified form in 1970. Remember that in 1940 all types of investment companies held only $1.8 billion worth of
The original Securities Act of 1934 established 10 perstock. By 1955 the amount had increased only to $6.4
cent as the standard for reporting on insider activities and billion, but it soared to $60 billion by 1971.
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 indiIn 1940 the stock held by noninsured corporate pension cated 5 percent as the level for presumptive ownership, funds was worth about $100 million. These noninsured but it does provide for further inquiry into each case. corporate pension funds did not begin their very rapid These standards set in the 1930's and 1940's have been expansion until they were energized by the combination
reconsidered for the ownership of air carrier and broadof the special provisions for employee benefit plans casting and television stations, including networks. On included in the Internal Revenue Code of 1942, the high October 25, 1972, the Civil Aeronautics Board (CAB) income tax rates of World War II, and the Inland Steel amended its regulations to require any person owning 5 decision made by the Supreme Court in 1949. This percent or more of an air carrier to report that fact to the decision upheld the duty under the Labor Management CAB. A presumption of ownership is made if any person Relations Act of 1947 for employers to bargain collectively owns 10 percent or more of an airline stock. A person who with employees on pension benefits.
acquires such control must receive permission or exempThe extent of portfolio concentration in the hands of
tion from the CAB. The 10 percent level is not a ceiling mutual funds argues for some substantial modification of
on ownership, but it is expected to result in an application the rules included in the Investment Company Act of 1940. for either approval or exemption from the presumption of At the very least consideration should be given to ap- control. plication of the 10 percent portfolio concentration
APPLIES TO INDIVIDUAL MUTUAL FUND provision to investment company complexes, rather than to individual investment companies. Consideration might
The 10 percent level is interpreted under present regu-
lations as applying to an individual mutual fund but a
Presumably there would be no limitation upon a bank
trust department holding 10 percent or more of the stock There are generally no portfolio concentration limits
of the two air carriers, but the CAB would be unlikely to established regarding the common stocks held by trust permit such common ownership by a single person, accorddepartments. One exception to that is for common trust
ing to the CAB staff.22 funds (pooled assets from small estates and trusts) administered by these banks.21 The total of these funds is
FCC Eased Rule for Banks well under 3 percent of the stocks held by trust departments. The very rapid recent and continuing growth of The Federal Communications Commission prohibits trust department stock holdings would seem to call for ownership of two TV, FM or AM radio stations which
serve the same area. However, the FCC permits an owner 10 Ibid., p. 18. The original Senate bill included a provision to limit the size of a diversified investment company to $150,000,000. provided that no more than five of the TV stations are
to control seven AM, seven FM and seven TV stations, 20 Ibid.
21 The regulations of the Comptroller of the Currency limit com- VHF. Additional broadcast company holdings were,
Bureau of Operating Rights, Civil Aeronautics Board, dated May which was less than 4 percent of all bank trust department assets. 31, 1973. Civil Aeronautics Board, Regulation ER-780, Part 245, About 48 percent of these common trust fund assets were invested Reports of Ownership Stock and Other Interests, mimeographed, in common stock. IIS, vol. 1, p. 111.
adopted October 25, 1973.
NO CONCENTRATION LIMITS FOR TRUST DEPARTMENTS