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The 1971 Institutional Investors Study Report by th institutions grow to mammoth size, they find Securities and Exchange Commission in its summary their opportunities for equity investments limvolume concluded that the trust departments of banks ited to the very largest publicly-held corporahave sole voting authority over stock constituting ap- tions, which are the only ones in which they can proximately 75 percent of the value of the common stock invest their millions without finding themselves, held in employee benefit accounts and have sole voting willy-nilly, in control because of the number of authority over about 55 percent of such stock in personal votes they can cast. If they could purchase trust and estate accounts.
larger percentage interests in smaller companies It is not possible from the information obtained from without automatically acquiring the control companies on their largest stockholders to ascertain the position they say they do not want, the access exact amount of voting authority that resides in each of the smaller companies to the principal equity nominee account. This would require extensive additional capital markets might be improved.' information from the banks and other institutions with nominee accounts. Thus, the holdings reported herein are
Thus it could be suggested that this report is only an not necessarily the equivalent of voting rights.
opening segment of a study that would truly reflect the It would also be useful to attempt to ascertain to what impact of institutional stockholdings on management extent the judgment of trust officers is sought and/or operations and control. This report documents the holdaccepted by beneficial stock owners where the bank is ings of many banks and other institutional investors in technically only in an agency or custodial position.
many of our leading companies. Even in this area, the There is another side to the coin that may be worth
extent of cooperation of companies addressed was limited. pursuing. There is considerable evidence that where they needed as to what the actual voting rights pattern within
But beyond this, first a separate investigation would be have voting authority bank trust departments almost automatically vote with management the overwhelming each nominee account in each bank is, and how that voting majority of the time. Displeasure with management is
pattern was exercised in practice. Finally it would be more likely to result in selling shares than in voting necessary to investigate the actual impact of the voting against management. It is often the case, of course, that pattern; how it correlates with other relationships between selling on any appreciable scale would 'have a serious
the financial institution and the corporation, e.g. through impact on prices of shares of such a company; it thus loans, interlocking directorates, and other formal and serves as a deterrent to selling by a bank trust department
informal relationships. or other large institutional investor. Several authors have made the point that banks are
D. CEDE AND COMPANY very reluctant to use their voting rights to influence
It will be noted that in a large percentage of the cases management.
Thus, for example, Paul P. Harbrecht in his 1959 study, Cede and Company is listed as being among the 30 "Pension Funds and Economic Power”, issued by the largest shareholders, in fact in many cases the single Twentieth Century Fund notes:
largest shareholder. The significance of this fact needs to
be carefully assessed, as already noted. It is quite likely that certain large New York Cede and Company was started in 1967 and became banks will soon approach a point where their fully operational on February 24, 1969, as the nominee combined holdings of stocks for pension funds for the Stock Clearing Corporation, a wholly owned could give their opinions considerable weight in subsidiary of the New York Stock Exchange, which the councils of the larger corporations. While it is furnishes a central stock clearing service to numerous the policy of many large corporations to include member brokerage firms. Thus, it represented deposits provisions in their pension plans to prevent their in the New York Stock Exchange Central Certificate funds from gaining control of other corporations, Service (part of the Stock Clearing Corporation), by no such restrictive policy has yet been announced participating institutions. On May 1ì, 1973, the Central by the banks. Unquestionably, they will seek to Certificate Service was superseded by a new subsidiary, spread their stock investments widely to stave the Depository Trust Company, subject to regulation by off acquiring the responsibility of corporate direc- the New York Banking Department, making it possible tion as long as possible. But as the stock pur- for banks and other institutional holders of securities chases of the pension funds continue to grow, we as well as brokerage firms to become members. The can anticipate that at some time in the not-too- functions of Cede and Company, as the nominee now of distant future the banker-trustees are going to be the Depository Trust Company, remain essentially the faced with an uncomfortable choice. They will same as what they had been as the nominee of the Central have to buy into a position of authority in the Certificate Service. larger corporations or reject profitable invest- For example, as reported by General Electric, the ments in order to avoid the responsibilities that 2,822,602 shares listed under Cede & Company (the third accompany large shareholdings.
largest holder of GE stock) represented holdings of 188 In a similar vein, David Ratner in 1970 wrote:
participants. Similarly, American Airlines reported that It would hardly lie in the mouths of the insti
there were 144 member firms with shares in the Cede
name, none of which separately would be among the top tutional managers to complain about being
30 stockholders. deprived of votes that they have so clearly indicated they do not want. Reducing the voting
It is perhaps not surprising, in view of this relation
ship between Cede and Company and member brokerage power of large blocks of shares might actually
firms, that there has been some inconsistency in manner of make their investment job easier. As these
* Ratner, David L. The government of business corporations; * Harbrecht, Paul P. Pension funds and economic power. New critical reflections on the rule of "one share, one vote.” Cornell York, Twentieth Century Fund, 1959, p. 248.
Law Review, v. 56, November 1970, p. 49. (See Appendix G, p. 393.)
29-553 0.74 - 10
reporting of Cede and Company's holdings. Most re- Stock Exchange in voting shares of record held by it. spondents apparently did not disaggregate brokerage Under these rules, stock of record cannot be voted for firm holdings within Cede and Company, and reported the benefit of others by members of the Exchange (or one lump sum attributable to Cede. Others disaggregated their nominees) unless the member firms have transmitted and listed only those individual brokerage holdings proxy soliciting material to the beneficial owners. Such within or outside Cede and Company that were among the member firms must vote such stock in accordance with top 30. Still others, notably several railroads, following the any voting instructions received from the beneficial
, form used in reporting to the Interstate Commerce Com- owners. Member firms may vote such stock in their dismission, listed in a footnote the number of shares held by cretion only if, after soliciting proxies, (1) no voting inCede and Company, but indicated that they are reflected structions have been received, (2) they do not have in holdings of brokerage houses where applicable. However, knowledge of any contest as to the action to be taken, and the amount held in each brokerage house account by Cede (3) the matter to be voted on will not affect substantially and Company was not disclosed. Another variation was to
the rights or privileges of such stock. indicate the amounts of the largest brokerage accounts within Cede and Company, as well as the total amount of
This leaves open the question as to the extent of actual the Cede and Company holdings, and then to subtract the voting of shares by Code and Company, the influence it Cede and Company holdings in the amounts reported by may exert on brokers or others in voting of shares, or the specific brokers, where
they were among the top 30 holders. extent to which what voting rights it may have are not According to the Depository Trust Company, Cede exercised. These are all matters deserving of future and Company is bound by the rules of the New York investigation.
MORE DETAILED INFORMATION NEEDED
The evidence on stock holdings which the respondents extent to which greater public disclosure and regulation to Senator Metcall's letter ided and which is presented may be desirable. and analyzed in this reporı is both illuminating in what it discloses and perhaps even more disturbing in what it fails to reveal. It also points to the need for a great deal more information about institutional holdings as a basis for In the first instance, much more detail on the holdings public policy in the interest of protecting investors and of particular institutions is needed to determine the role preserving competition.
which their holdings permit them to play. In some cases The Senator's letter of inquiry requested only the a bank or other institutional investor holds complete simplest of information on stockholders, solely a listing of fiduciary power, with full voting rights and authority the 30 largest stockholders of record of 324 of the largest to buy and sell securities. At the other extreme, it has companies of the country. And yet this information was purely custodial or agency responsibilities, with no rights supplied by only 89 companies, or 27 percent of the total. to vote stock or to buy or sell. There are considerable While reasons of confidentiality were cited in a large variations in between. Not only is it important to learn nunber of cases as a reason for nondisclosure, as discussed the legal rights pertaining to the exercise of authority in above, the inconsistent nature in which this nondisclosure handling stocks by various institutional holders, but fully was applied makes one skeptical, at least, as to the sound- as important is the need to ascertain how these rights are ness of the position of those who refused to submit data actually exercised. A small beginning was made in this on these grounds.
direction by the Securities and Exchange Commission's
Institutional Investor Study report of 1971, but even here VARIATIONS IN REPORTING REQUIREMENTS
little information was obtained as to how an institution
actually exercised its voting rights, what were the factors It was also striking to note the wide variations in current that determined its buying and selling of particular blocks reporting requirements by different Federal agencies as to of stock, and how its holdings were reflected in the decisionmajor stockholdings of companies subject to particular making policies of the corporations where its holdings are regulatory jurisdictions. These variations help explain the substantial. differential in the extent to which companies in various Not only in Congress and among many members of the industry groups complied with the Senator's request and public, particularly the investing public, but even in the suggest the need for far more consistency in the law than financial press and in financial circles, there has been currently exists.
growing concern over the well-documented rise in the Even the limited information which does appear in this dominance of the institutional investor and the relative report as a result of the responses to Senator Metcall's decline of the small shareholder. But appropriate remedies letter is sufficient to confirm in graphic detail the enormous have been difficult to come by. This is due, as this report size of institutional holdings of stock in major American makes abundantly clear, in large measure to the paucity corporations and, by implication, the vast influence which and inadequacy of available information. Clearly informathese institutions have or can have in the financial markets tion along the lines suggested above must be obtained. of the country and the managements of these corporations. Just as clearly, judging from past experience, there will
It is obvious, however, that much further information is be determined resistance in the institutional investment required in order to make an accurate assessment as to the community against voluntarily supplying such informaactual power and influence which banks, brokers, and tion. Thus a challenge to the Congress exists to ascerother institutional investors exert on corporate and tain what information should be required, how it can be financial management behavior, the effect which they most effectively obtained, and the extent to which it thereby have on the entire American economy, and the should be made public.
Addendum to Part I
NOMINEE ACCOUNTS—AN INTRODUCTORY EXPLANATION
It is a little publicized but significant fact that the tered $131 billion or 73 percent of the $180 billion total. trust departments of banks, brokerage houses, and other They also are estimated to exercise sole voting authority financial institutions hold major blocks of stock of Ameri- for $72 billion (market value) of common stocks, or 55 can corporations in nominee accounts. Although the basic percent of the $131 billion of stocks they administer. purpose of such accounts is to be able to handle blocks of These common stocks are in not just the personal trust stock more efficiently in the interest of the beneficial and estate accounts referred to in the American Bankers owners of the stock, nominee accounts also may well put Association study above, but also in employee benefit banks in position to use the voting authority provided in accounts and agency accounts. such accounts to influence corporate decisions and policy.
A nominee has been defined as “a person (or persons) SIGNIFICANCE OF TRUST DEPARTMENT HOLDINGS designated to represent or take the place in name only of another person, bank, company, or corporation.”
Recognizing the magnitude of stock holdings by bank 1
trust departments and other financial institutions, the USE OF NOMINEE ACCOUNTS
crucial and thus far largely unanswered question is what
these holdings mean in terms of bank control of, or The use of nominees or nominee accounts by banks, in- influence on, the corporations whose stocks are held by surance companies, brokerage houses, investment funds, these institutions, and of their impact upon the securities and other financial institutions has become a common and markets. well established practice. In the Twenty-second (January 1973) edition of the Nominee List, issued annually by the VARIATIONS IN TRUST DEPARTMENT AUTHORITY American Society of Corporate Secretaries, over 6,000 names of nominees are listed, together with approximately ture," writes: "the bank's authority may vary from full
Gerald Fischer, in his text, "American Banking Struc2,000 banks and other firms in which these nominees are to be found. Nominee registration of corporate stocks is
power to buy, sell, and vote the stock to virtually no
power whatsoever, with the beneficial owners able to designed to take advantage of operating efficiencies associated with this practice, especially those related to collec
exercise all prerogatives of ownership." tion of income and transfer of ownership.” ?
Further detail on the variance in scope of bank authority In view of the prevalence of the use of nominees it is letter from the chairman of the Board of Governors of the
with respect to stocks it holds as trustee is given in a surprising that texts and other literature on banking pro- Federal Reserve System, William McChesney Martin, vide scanty information on nominees. The most consistent information has been that provided by the American So- Jr., to Congressman Wright Patman, dated October 9, ciety of Corporate Secretaries, already cited above.
1962. For purposes of its analysis the Federal Reserve The extent of corporate stock ownership held in nominee Board used the following classification of relationship
between bank nominees and beneficial stock owners, accounts has never been fully determined. But from the
which is that used by the American Society of Corporate various estimates which have been made, as well as from
Secretaries in its Nominee List: this survey, it is clear that the number is large indeed. Thomas Jolls, then vice president of the Northern Trust (a) Estates Company of Chicago, speaking at the 1954 annual meeting (b) Living and testamentary trusts of the American Society of Corporate Secretaries, Inc., (c) Pension trusts stated: “As a rough figure, probably 25 percent of the (d) Investment management accounts stock of our leading corporations is registered in the name (e) Corporate trust accounts of brokers or bank nominees." 3
(f) Safekeeping or custody accounts (domestic)
(g) Safekeeping or custody accounts (foreign) GROWTH OF TRUST DEPARTMENT ASSETS
Legal and common trust funds The American Bankers Association has estimated that In cases (a) estates, (b) living and testamentary trusts, the market value of common stocks in personal trusts
and (h) legal and common trust funds, the bank acting administered by banks with trust assets of $10 million
as executor, administrator, or trustee exercises all incior more amounted to $30.7 billion in 1958 and $37.2
dents of legal ownership, including the power to exercise billion in 1959. By 1969, according to a study of the voting rights with respect to corporation stock shares it Securities and Exchange Commission, trust departments holds. In these cases, in the absence of contrary provisions of commercial banks in the United States administered
which may be contained in individual governing trust $180 billion of common stock. The 50 largest trust de- instruments, shares held in the fiduciary capacities would partments, as of the end of 1967, during 1969 adminis
* U.S. Securities and Exchange Commission. Institutional i Fischer, Gerald C. American Banking Structure (New York, Investor Study Report. Summary Volume. (92d Congress, 1st 1968), p. 88.
Session, House Document No. 92-64, Part 8). March 10, 1971. p. 2 Ibid., p. 86.
34-35. * American Society of Corporate Secretaries, Inc. Report, Eighth . Fischer, Gerald. Op. cit., p. 86. Annual Meeting, May 31-June 2, 1954, p. 45.
' In: U.S. Congress. House. Select Committee on Small Business. * American Bankers Association. The Commercial Banking In- Chain banking, stockholder and loan links of 200 largest member dustry. (Englewood Cliffs, N.J., 1962) p. 302.
banks (Washington, U.S. Govt. Print. Off., 1963), pp. 16–17.