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and 3 percent for mutual funds. One rationale given for this limitation was the great public interest in preserving the diversity of programing and service.

RULE NOT ENFORCED

However, the rule on additional holdings was not enforced. One reason was the difficulty the FCC had in learning who had the proprietary ownership of the stock when large blocks were held in "street names." The FCC began an inquiry into this matter on November 25, 1969. During the course of its inquiry it learned that 19 of the largest banks were in violation of the 1 percent rule. Divestiture back to the 1 percent level would have involved the sale of $976 million of stock in 25 companies. Divestiture back to the 3 percent level would have involved the sale of $256 million of stock in 15 companies, and divestiture back to the 5 percent level would have involved $84 million and 9 companies. The American Bankers Association and others urged the 10 percent level which would have involved the divestiture of only $4 million of the shares of one company. The Columbia Broadcasting System, the American Broadcasting System, and others urged a 5-percent level, while three other broadcasters, Taft, Storer, and Corinthian, supported a 3-percent "benchmark."

Last year the FCC established-for banks only a 5percent concentration limit on the stock of a broadcasting company with 50 or more stockholders (for holdings in excess of the seven AM, seven FM and seven TV limit mentioned above). If a bank holds more than 5 percent it must file a disclaimer of intent to control the management of the policies of the broadcasting corporation. The banks were given 3 years to bring themselves into compliance with the new FCC rules. The 3 percent limit for mutual funds and 1 percent limit for individuals were maintained.24

DISSENTING OPINION

FCC Commissioner Johnson addressed himself to institutional ownership in his dissent in a related case later last year. Said Johnson:

One looks in vain in the majority document for any discussion of the important issues concerning institutional ownership of the stock of other companies-questions of control, influence, collusive or parallel behavior where a number of institutions own a company, and the impact on managerial decisions to expend resources to serve the public. The majority is content to rely on the assurances of non-interference offered by those seeking the benefits of the rule change.25 Commissioner Johnson pointed out that the views of the Justice Department were not requested, that there was no reference to the studies of the House Banking Committee prepared under Chairman Patman or any evidence of the extent of ownership by mutual funds. He raised the question of why banks should be treated more favorably than mutual funds.

The FCC rules do not seem to provide for the situation in which the same financial interests have substantial

holdings in two or more competing broadcasting com-
panies. Comment received from the CAB recognizes this
problem and suggests that the CAB is unlikely to permit
the potential weakening of competition by such means.
5. Disclosure of Portfolio Concentration in the Same
Industry by One or a Few Institutions

The development of strong portfolio concentrations in presumably competing companies by the same financial intermediaries carries a potential danger with it that has not as yet been widely recognized.

Concentration in Airlines

For example, bank numbered two in the IIS special tabulation held more than 2 percent of the stock of five different airlines included in the sample. In two of these instances its holdings exceeded 4 percent and in another it exceeded 6 percent. All of the primary and secondary airlines in the country were not included among the sample of the stock in five airlines. In one of these cases it held companies. Bank numbered three held 3 percent or more almost 5 percent and in two others it held over 7 percent alone held more than 10 percent of the stock of three of the common stock. These two bank trust departments

different airlines.

in 19 different industries. These detailed data are shown Similar stock holding and voting patterns were reviewed as Appendix D, Table 2.

The whole subject of portfolio concentration patterns in an industry by a limited number of financial institutions is so important that it is discussed separately in the second major section of this report. Insurance is another industry in which the stock holding and voting pattern merits substantial attention.

Holdings Should be Public

Surely when a financial institution holds a very substantial percentage of one company in an industry, the extent of its holdings in competing companies in that industry should be readily available to investors, government bodies, and the public at large. A substantial percentage of voting control for this purpose might be set at 5 percent. There is ample precedent for the 5 percent level in the rules of the FCC and CAB, the disclosure level for takeovers, and the presumption of control in the Bank Holding Company Act. Furthermore, the original draft of the Investment Company Act of 1940 would have limited mutual funds to 5 percent of the shares of a portfolio company in addition to the free pool that was provided. (The free pool is no longer of great importance but was a useful part of the evolution of mutual funds.)

6. Special Problems That Might Exist or Develop in the Broadcasting and Publication Industries

The potential implications of concentrated ownership by a group of financial institutions in the broadcasting and publishing industries are so great as to merit special attention. These problems would be potentially more intense if the same group of financial intermediaries held a significant proportion of the outstanding voting stock of two or more

Lee Metcalf, "The Secrecy of Corporate Ownership," Indiana large competing companies. Any direct or indirect efforts to

Law Review, vol. 6, No. 4, 1973.

24 Federal Communication Commission, Docket No. 18751, RM-1460, Adopted May 9, 1972.

25 FCC 72-525, 79407, File No. BTL-6682, adopted June 14,

1972.

limit the diversity, range of programing, or local originations of news and entertainment are a matter of highest national concern. The independence of newspapers, magazines, radio broadcasting, television, CATV, motion

pictures, and other media that now exist or that might develop would be better safeguarded by a truly wide dispersion of stock holdings in "widely held" corporations.25

Broadcast Company Data Inadequate

The state of ownership concentration in broadcasting and several other industries that might be of particular national interest cannot be analyzed in this paper because of lack of data in the 1969 IIS sample."

Concentrated holdings of the voting stock in broadcasting and publishing companies is shown in part by available historical evidence. In 1966, four mutual fund complexes owned 19.5 percent of the common stock of Metro-Goldwyn-Mayer. Only limited information about the extent of bank trust department holdings of common stock in 1967 was made available to the House Banking and Currency Committee.

WARRANTED BY PUBLIC CONCERN

The IIS report did not include the institutional stock holdings of most of the major broadcasting, television, magazine, and newspaper corporations. Such information is warranted because of public concern. None of those corporations that were included in the sample of 800 stocks were at the 15 percent concentration level among the holdings of bank trust departments, and only Teleprompter and Norton Simon were at that level among the mutual fund holdings. 28 29

At the end of 1972, mutual funds alone as a group held 15 percent or more of the common stock of the following three companies: 30

Percent 31. 1 18. 5 15. 3

American Broadcasting Company. Capital Cities Broadcasting Corp. Columbia Broadcasting System.... These summary data do not show the degree of concentrated ownership among mutual fund complexes, and there are no data for bank trust department holdings since 1969. The need for regularly published information for various public policy uses and for investor information is too obvious to merit any elaboration.

26 The number 50 has been used by the FCC and CAB as an arbitrary dividing line for distinction between closely held and widelyheld corporations. In the past, 20 stockholders has often been used

as the arbitrary breaking point between closely and widely-held corporations. The exact number will always be a matter of judgment or law but the number selected for the present purposes is unlikely to be of much importance for the large corporations which are the subject of this paper.

For specific and current (1972) data on bank voting rights in broadcast companies, see pp. 165-182.

38 Teleprompter is the largest CATV company. Norton Simon, Inc., publishes McCalls and Redbook and also prints magazines for other publishers. Norton Simon is a widely diversified company. Some of the other products that it manufactures and/or distributes include Hunt Foods, Canada Dry, and Walker Scotch.

29 The companies in the 800-stock IIS sample that might be construed as being in the broadcasting and publishing industry that

were recognized as such were: Communications Satellite Corporation, Gulf & Western Industries, Metro-Goldwyn-Mayer, Twentieth Century-Fox, Technicolor, Time Inc., and Dow Jones & Co.,

Inc.

30 Investment Companies-1972 (New York: Wiesenberger Services, Inc., 1972) p. 477.

Recently several of the largest banks have voluntarily disclosed the market value of their largest common stock holdings. These disclosures generally have been limited to their top 50 holdings in terms of market value. For example, on August 6, 1973, the Continental Illinois National Bank and Trust Company of Chicago announced its top 50 holdings. Their three largest holdings were as follows: IBM, $210 million; Eastman Kodak, $210 million; and Texaco, $166 million. The only publishing company recognized on this list was Dun & Bradstreet, Inc.

7. Uniformity of Treatment of Financial Institutions

The federal regulations governing the holding and reporting requirement for stocks held by regulated investment companies and by the trust departments of commercial banks are strikingly different. The holdings of reguSEC and to those who own shares in such companies. lated investment companies are reported regularly to the These reports are the basis of summaries that are prepared by several businesses. No such data are available regularly from banks except that small part of their share holdings which is invested in their common trust funds.

Review of Portfolio Concentration Limits Appropriate

Specific limitations on individual portfolio concentrations for regulated investment companies were written into the Investment Company Act of 1940 and have not been revised since that date. In view of the growth of the institutional investment in general and the changing meaning of presumptive ownership for regulatory purposes, a searching reconsideration and modernizing of the relevant provision of the Investment Company Act would appear to be appropriate. Some criteria for limiting the concentrated holdings and the potential effect that such holdings have on competition might well be considered at this time. The continuing growth of institutional holdings of votings tock increases the urgency of such considerations.

NO EXPLICIT REGULATIONS

Except for the regulation of the concentration ratios for common trust funds, there appears to be no explicit regulations for the limitations upon the portfolio concentrations developed by bank trust departments.

The portfolio concentrations of life insurance companies and property and casualty insurance companies are limited generally to 2 to 5 percent depending upon the states in which the insurance companies are domiciled and in which they operate. State and local pension funds include portfolio concentration limitations similar to those in state legislation governing the investments of life insurance companies. Even though stock holdings of life insurance companies and especially those of state and local pension funds will continue to grow rapidly for the rest of this century, the danger of excessively concentrated ownership by these financial intermediaries appears to be small at the present time."

8. Future Growth of Individual Portfolio Concentration, and Industry and Overall Concentration Levels

The reason for consideration of concentration now is to contain pools of financial power within acceptable bounds before they grow beyond what would be generally acceptable. First, the present 10 percent limitation for the portfolio concentration might be reconsidered and reduced-to 7.5 percent, for example for regulated investment companies, and this same limitation might be applied to mutual fund complexes, that is, mutual funds under a common management. The free pool, which exempts up to 25 percent of a fund's assets from this limitation, might be reconsidered. Several states have already eliminated the free pool provision for mutual funds operating within their borders. A review of portfolio concentration percentages in the special IIS tabulation for regulated investment companies indicates that this free pool pro"Robert M. Soldofsky, op. cit., pp. 54–72.

vision is not being utilized anyway. Considerations relating to ownership of two or more companies in the same industry will be set forth in the next section after the evidence is discussed.

PORTFOLIO CONCENTRATION LIMITATION

A similar portfolio concentration limitation might well be applied to both bank trust departments and regulated investment companies. Only in 14 instances among the 800 stocks in the 1969 IIS sample was the illustrative 7.5 percent concentration ratio exceeded by bank trust departments as shown in Table 1. The 7.5 percent level was exceeded by mutual funds in only 9 instances for the 800 stocks included in the 1969 IIS sample.

Arguments Against Limitation

Three notable arguments have been made against a specific limitation. First, close historical ownership ties may exist between a company and a specific bank. These have been provided for in the case of investment trusts by the free pool arrangement. A free pool providing that not more than a specified percentage of the discretionary funds of a bank trust department may be exempted from these portfolio concentration limitations would be useful. The free pool plan was worked out originally because of the problems that were encountered in the holdings of investment companies prior to the Investment Company Act of 1940. The problems resulting from the heavy holdings of investment companies in a few industries are a matter of painful historical record. Such a free pool plan for stock held by bank trust departments is likely to result in the need for little portfolio adjustment. If such adjustments are necessary, a period such as 3 years could be allowed to complete such adjustments, as was provided for in the FCC rulings previously discussed.

SECOND ARGUMENT

A second argument that dates back to the 1940 hearings on the Investment Company Act is that a small percentage of the funds of the institutional investor will amount to a very large proportion of the value of the outstanding stock of a small company. The point is well made, but the historical record will show very few, if any, instances in which the stocks of emerging companies were not purchased for such a reason. Even if a magnificent opportunity is sometime partly missed because of legislative restrictions, the safeguard is prudent and will tend to prevent unwarranted excesses. When the ownership concentration ratio reaches some level such as 10 percent or above, the case for calling the institutional holder of that much stock the presumptive maker of major policy decisions within the firm is extremely strong.

THIRD ARGUMENT

A third argument is to provide access to the capital markets for small, emerging firms. Surely the capital markets are available to small firms even though they do not offer their shares directly to institutional investors. For example, under Regulation A of Section 3(b) of the Securities Act of 1934, securities may be offered to the public for amounts not above $500,000 provided specific conditions are met. Regulation A provides for less stringent requirements for public offerings of $500,000 or less than

for larger offerings. Under Regulation A 838 notifications for offerings of $254 million were made in fiscal 1971. In fiscal 1972 there were 1,087 Regulation A notifications for offerings of $404 million.33 In more than half of these cases no underwriter was used.

Arguments for Limitation

Arguments are made for reviewing and reducing the present 10 percent portfolio concentration limitation quickly. First, the larger the concentrations, the more subject the market will be to wide price fluctuations as a few larger owners lean in the same direction. The greater the number of owners in the range of about 1 to 7.5 percent, the greater the chances for more diversity of opinion as compared with even higher concentrations. The degree of price stability and liquidity in the market for a specific stock would tend to be increased by lower permitted concentration levels.

Second, the larger the portfolio concentration, the more likely the holder is to have direct or indirect day-to-day influence on the decisions of the business.

CONCENTRATION OF POWER

Third, the concentration of power in the hands of a limited number of holders or voters is fraught with suspicion in the United States. In numerous instances such such as 7.5 percent, seven institutional investors holding suspicion has been well founded. Even with a limitation the maximum percentage would have potential absolute control of the company. The extent to which that condition was being approached in 1969 is summarized in Table 5 aspect of the scope of the power of commercial banks was and shown in detail in Appendix D, Tables 1 and 2. One Conflicts of Interest Related to Nondisclosure" 34 discussed earlier under the subtopic of "Self-Dealing and

Fourth, academic research has shown that only 15-20 stocks need to be owned to eliminate systematic or market-related risk of price fluctuations. As professional security analysts and executives apply these findings more vigorously, the strong tendency will be to reduce the number of stocks in a portfolio and to increase the portfolio concentration ratios. Such actions would tend also to reduce the costs of analyzing and following a larger list of stocks that are in a portfolio or might be considered for purchase. Imposing a reasonable ceiling on portfolio concentrations now would be more desirable and easier to administer than to call for a rollback a few years from now.

HOLDINGS INCREASING

Fifth, institutional holdings of common stock are continuing to increase in relative and absolute terms. Institutional holdings are increasing faster than the total market value of all stocks. The inevitable result is an increase in the extent of concentrated holdings as we move toward the year 2000 and beyond. For the NYSE as now constituted, by 1980 about 30-38 percent of the total market value of listed shares will be in the hands of institutional investors; by 2000 that range will increase to 46-58 per

33 38th Annual Report of the Securities and Exchange Commission, 1971 (Washington, D.C.: Government Printing Office, 1973), p. 28. The Regulation A exemption was increased from $300,000 to $500,000 in 1971.

For a more wide ranging and philosophical discussion of the nature of power as it applies to the concentration of ownership within financial intermediaries, see Robert M. Soldofsky, op. cit., pp. 114-138.

cent. These projections are discussed in more detail in the final part of this paper. As individual company portfolio concentrations increase, these concentrations will tend to spread more widely and deeply over industries that have desirable characteristics for common stock investment by financial institutions.

THE REASONABLENESS OF THE ONE PERCENT
LEVEL FOR PUBLIC DISCLOSURE

Table 1 shows that the number of instances of concentrated holdings increases at an increasing rate as the concentration ratio percentage decreases. Within the IIS sample, 577 instances of concentrations above the 1 percent level were located. As remarked earlier, the sample was so drawn that one could only make an educated estimate that the total number of institutional holdings at the 1 percent level or above may be in the range of 3 to 5 times larger than that of the sample. Numbers of portfolio concentrations of 1 percent or more is probable in the 1,500 to 2,500 range. Such numbers are well within the limits of administrative feasibility and understanding.

CENTRAL PUBLIC DEPOSITORY

From the individual company's point of view, most companies that are subject to portfolio concentration ratios of 15 percent or above would have to list, in their annual reports, the names of 5 to 10 institutional owners of their stock along with the number of shares owned. The same information would have to be reported by the institutional investor, to the portfolio company and to a central public depository such as the Library of Congress, for each stock held at the 1 percent level or above. Table 6 shows the frequency distribution of instances in which the portfolio concentration was 1 percent or more for the 800 companies in the 1969 IIS sample. The tabulation is limited to total portfolio concentration ratios of 15 percent or more for bank trust departments and regulated investment companies.

Table 6.-FREQUENCY DISTRIBUTION OF HOLDINGS OF 1 PERCENT OR MORE OF THE OUTSTANDING COM

Reporting No Burden

Some means will have to be devised to require institutional investors owning 1 percent or more of a portfolio company to report that fact to the company itself in sufficient time to have that information included in its next annual report. The major problem is the widespread custom of institutional investors of holding shares in street name for convenience. Although larger companies may have the time and the staff to sift through the street names and to learn the identity of the institutional holder, that task is often extremely difficult if not impossible. Institutional owners generally either know or should know the extent of their stock holdings in their portfolio companies. Reporting such information to their portfolio companies regularly would require such a relatively small. amount of time and added outlay that time and cost could not be taken seriously as a defense against such a reporting requirement.

CAB REQUIRES PUBLICATION OF INSTITUTIONAL OWNERSHIP

The CAB now requires publication in corporate annual reports of institutional ownership of their stock at the 5 percent level or above.35

The 1 percent level of portfolio concentration as the threshold point for the regular reporting and convenient publication of such information appears reasonable. After some experience with this threshold level, administrative revisions that appear to be necessary should be considered. During the coming years the background basis for this threshold point will be changing, and reconsideration will be merited on that basis also.

REGULAR DISCLOSURE USEFUL

An argument might be made for moving the threshold down to 0.75 percent or even lower to provide stock traders and investors with additional information. Just how such additional information may be of general use is difficult to envision. What most stock traders would prefer to know is who bought or sold which shares yesterday, and what the buyers and sellers are going to do both during the

MON STOCK IN THE SAME COMPANY BY INSTITUTIONAL present trading day and the next trading day. They would

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also like to have all of the information about each stock, as well as the basis of each trader's decision to buy, hold, or sell. The SEC, the exchanges, the National Association of Securities Dealers, the corporations themselves and the accounting profession have progressed rapidly in the past few years in furnishing more information, better quality information, and more timely information. Even projected earnings will soon be published in large numbers of corporate annual reports. Regular disclosure of portfolio concentration information will be useful to investors and others, but there is very great doubt that portfolio concentration information below the recommended 1 percent level will be of enough further use to warrant its publication.

FULL AND PARTIAL VOTING RIGHTS

The special tabulations made of the IIS data which are being used for this study show both full and partial voting rights for bank trust departments. In numerous instances

35 Civil Aeronautics Board, Part 245-Reports of Ownership of Stock and Other Interests, op. cit. This report summarizes comment received on the preliminary proposal received from two scheduled air carriers, four financial institutions, the Aviation Consumer Action Project, and the Flight Engineers International Association.

partial voting rights amount to 1 to 2 percent of the outstanding stock of the portfolio companies. Most instances of the partial voting authority of stocks held by banks is found among the personal trusts and estates administered by the banks. The stock held by personal estates and trusts constituted somewhat less than half of the $231 billion of stock held by the trust departments at the end of 1970. Banks typically have sole voting authority in employee benefit accounts, which are the most rapidly growing sector of their stock holdings. For large employee benefit accounts, bank trust departments had full voting authority in about 80.5 percent of the 493 cases sampled by the IIS report. In 8.2 percent of these cases the bank is reported as having no authority; in another 2.1 percent it consults in voting; in 7.3 percent of these cases listed as partial voting authority the bank votes the stock if instructions are not received; and in 1.8 percent of the cases the authority differs among stocks within a given portfolio. This paper understates the potential voting power of bank trust departments in that only their sole voting rights have been tabulated.

36

Banks Generally Vote All Stock One Way

The preceding summary of voting rights is not adequately instructive about what happens when stock is voted regularly on routine issues. The FCC inquired in to the matter of full and partial voting rights in the investigation it began November 25, 1969, and completed May 9, 1972. At the conclusion of its investigation the FCC reaffirmed its position that full and partial voting rights would be treated the same way. The testimony heard by the FCC included oral presentations from the senior trust officers of four large banks; these officers were questioned by the FCC commissioners after their presentations. The FCC Report and Order included the following statement:

The Commission has adopted aggregation of ownership of stock in trust accounts where banks hold any right, either partial or whole, to vote for the reason that any large position in itself has the potential to be a force in management because banks generally vote the stock one way. The testimony in the comments and at the administrative conference by the trust officers clearly pointed out that the banks (where they hold the sole power to vote) generally vote all the stock of a given company in the same way.37

FURTHER INVESTIGATION WARRANTED

The FCC investigation was apparently more thorough on this point than that of the SEC. However, further investigation is clearly called for. If it turns out that the person or organization whose stock is held by a bank trust department rarely or never exercises his partial voting authority, the shares held with partial and full voting authority should be totaled in applying the recommended 1 percent reporting threshold. Individuals and/or banks could be required to show cause for any other treatment.

PORTFOLIO CONCENTRATIONS COVERING TWO OR MORE COMPETING COMPANIES The amazingly rapid growth of the absolute and relative amounts of common stock held by institutional investors did not start until about 1950. At that date regulated in

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vestment companies had assets of $4.7 billion; noninsured corporate pension funds owned about $774 million of stock; life insurance companies held about $2.1 billion; property and casualty insurance companies held about $3.4 billion, and state and local pension funds held almost no stock. The total assets of state and local pension funds were only about $5.3 billion in 1950.

LACK OF INFORMATION

Under those circumstances no one in the 1950's-nor many in the 1960's-seems to have been concerned with the potentially explosive growth of institutional ownership of common stock that would lead to significant potential voting control in two or more competing companies in the same industry by a rather limited number of predominant financial intermediaries. One major reason that this coming development may have been overlooked was the lack of detailed information about the stock held by the trust departments of commercial banks.

The IIS report does not provide any direct tabulations of the extent to which financial intermediaries hold stock in companies within the same roughly defined industries. However, the form of the data in the special tabulations prepared for Senator Metcalf from information collected for the IIS report made possible the unique industry analysis presented here.

Appendix D, Table 2, which has separate subtables for 19 industries, shows the extent to which the same bank trust departments hold stock in companies in the same industry.

IMPORTANT LIMITATIONS

few of the companies in some industries were included in One important limitation of these tables is that only a the basic 800-stock sample of the IIS. Another limitation, in terms of understanding the extent to which financial intermediaries may be predominant among a number of corporations in the same industry, is the fact that these tables are prepared for bank trust departments only. For the airline industry alone, a broader showing of institutional holdings in 1966 from an earlier study will be presented.

The 19 industries and the number of companies inIcluded in each are as follows:

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