have over their accounts, and how much potential economic power such institutions have over the companies whose securities they hold. Many public policy implications obviously emanate from the investment activities of large financial institutions. And, as the disclosure report correctly concludes, the first step toward facing those public policy questions is to get full disclosure from all such institutions of their securities holdings and transactions.

The present system of haphazard, inconsistent reports by institutional investors and of episodic, irregularly scheduled studies of institutions does not provide regular, systematic, and comprehensive economic information about the growth and characteristics of institutional investing. Neither does it disclose on any continuing basis the impact of institutional investments on the structure of the securities markets and the involvement of institutional investors in their portfolio companies' corporate affairs. Finally, it does not provide individual investors (who may perceive the various institutional investors as legitimate competitors for their investment dollars) with enough coherent information about some institutions to compare different institutional policies on investment objectives, portfolio turnover, or performance.

Other persons would be interested in and benefit from ongoing institutional disclosure. For example, independent directors of mutual funds could more easily fulfill certain of their fiduciary duties regarding use of fund brokerage if they were able to compare their investment companies' transactions with analogous elements in other institutional investor complexes. The brokerage community in general could better anticipate trends in institutional investing and thereby continue to provide liquid, efficient capital markets for investors. With the sharp glare of publicity on their investment activities, institutional investors should become more wary of engaging in any seemingly manipulative, deceptive, or unfair conduct, in self-dealing transactions, and in building up unreasonably concentrated portfolio holdings.

Finally, regulatory agencies with responsibility for the securities markets and for examination of one or another category of institutional investors cannot at present compare the behavior and attitudes of their regulatees with that of other institutional investors and other regulatory agencies. For example, during the past several years, one of the SEC's chief concerns has been the future structure of the securities markets.5 Disclosure by institutional investors would provide continuous hard data, updating that collected by the IIS report. Similarly, another area of concern has been the behavior of institutional investors as investment managers. Here again, disclosure by institutional investors would provide continuous information, updating both the IIS report and the disclosure report.

3 For a good summary of present institutional reporting of securities holdings and transactions, see SEC, Institutional Investor Study Report, H.R. Doc. No. 64, 92d Cong., 1st sess., pt. 1 at 23 (1971) (IIS report).

L. Brandeis, "Other People's Money and How the Bankers Use It," 93 (1914): "Publicity is justly recommended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman."

5 See statement of the Securities and Exchange Commission on the Future Structure of the Securities Markets, 137 BNA Sec. Reg. & L. Rep. (Feb. 2, 1972) (pt. II); Adoption of Securities Exchange Act rule 19b-2, concerning the utilization of membership on national securities exchanges for public purposes, SEC Securities Exchange Act Rel. No. 9950, 185 BNA Sec. Reg. & L. Rep. (Jan. 17, 1973) (pt. II); policy statement of the Securities and Exchange Commission on the structure of a central market system, 196 BNA Sec. Reg. & L. Rep. at D-1 et seq. (Apr. 4, 1973).

PRIOR CALLS FOR IMPROVED DISCLOSURE

With concern for the potential economic power of institutional investors as its touchstone, the Patman report first recommended for consideration annual disclosure by bank trust departments of aggregate holdings of securities and of all proxy voting of portfolio securities of corporations registered with the SEC. Section 12 of the Banking Reform Act of 1971, based on these recommendations, would have required all insured banks to report annually and publicly to the FDIC all securities held in a fiduciary capacity (aggregated without regard to investment responsibilities) and all voting authority, indicating the extent and manner exercised.

In addition, Representative Patman, in a recent address to the First Trust Management Conference, proposed giving the SEC power to regulate all aspects of institutional investing:

"I would give the SEC original jurisdiction over all elements of the institutional investment community-foundations, pension funds, bank trust departments, and all the others. . . the entire range. Obviously, such an approach-to have meaning-would have to go beyond the traditional SEC regulatory role.

"It is my intention to give them broad supervisory powers accomplish this, SEC would have to establish a special division with expertise and a public interest character-going beyond the nuts and bolts of the securities business." 8

Concern with the impact of institutional trading on the securities markets and the lack of disclosure by institutions of their holdings and transactions caused Congress in July 1968 to authorize the SEC to make a study and investigation of the purchase, sale, and holding of securities by institutional investors of all types (including, but not limited to, banks, insurance companies, mutual funds, employee pension and welfare funds, and foundation and college endowments) in order to determine the effect of such purchases, sales, and holdings upon (A) the maintenance of fair and orderly securities markets, (B) the stability of such markets, both in general and for individual securities, (C) the interests of the issuers of such securities, and (D) the interests of the public, in order that the Congress may determine what measures, if any, may be necessary and appropriate in the public interest and for the protection of investors.9

The study was directed and staffed largely by professional economists drawn from outside the Commission and had associated with it a statutory industry advisory committee. The IIS report consists of four major parts. Part 1 sets forth basic background information about the analysis of institutional investors through 1968. Part 2 reviews different institutions as investment managers, setting forth comparative information as to each type of institution regarding: the size distribution of firms within each category; the number, size, types, growth, and distribution of assets in accounts managed by each type of institution; and fees charged by and portfolio turnover for the various types of institu

• Staff report for the Subcommittee on Domestic Finance, House Committee on Banking and Currency, 90th Cong., 2d sess., Commercial Banks and Their Trust Activities: Emerging Influence on the American Economy, at 9 (committee print 1968) (Patman report). 7 H.R. 5700, 92d Cong., 1st sess., sec. 12 (1971).

118 Congressional Record H5914, H5915 (daily ed., June 21, 1972) (remarks of Representative Wright Patman).

Public Law No. 90-438 (July 29, 1968), quoted in IIS report, pt. 1, at 1.

tions. This part also examines the effects on the institution's portfolio managers of affiliations between types of institutions and other firms. In part 3 of the IIS report the study focuses on the impact of increases in the volume and character of institutional holdings and trading on price volatility, market structure, and the securities industry. Finally, part 4 analyzes institutional participation in new issues, and the role of institutions as large and influential shareholders in portfolio companies. As one would expect, the IIS report is a massive study of eight volumes, requiring 9 inches on a Government bookshelf.

The SEC, in its letter of transmittal submitting the IIS report to Congress, stated certain initial conclusions and recommendations regarding the study's analysis of the area. Not surprisingly, the first conclusion was that the essential nature of timely information about institutional holdings and trading in the equity security markets required that such information be collected by the agency responsible for administration of the Federal securities laws. The Commission also stated that an effective program of government regulation of institutional investors and the securities markets must emanate from empirical analyses of institutional behavior; that the course of future developments could not be accurately guaged, or reasoned regulatory policies be plotted, without a continuing flow of such information.

To implement these conclusions, the Commission recommended that the Securities Exchange Act of 1934 be amended to provide the Commission with authority to require reports and disclosures of such holdings and transactions from all types of institutions. Last fall, Senator Williams introduced the Commission's draft legislation, which became S. 2683, amending section 13 of the Securities Exchange Act to accomplish those purposes. 9A S. 2683 would require certain institutions to provide the Commission with data concerning their securities holdings and certain equity security transactions so that the SEC could continue certain of the studies and analyses which the IIS report began-studies and analyses which are necessary and essential to the SEC's statutory responsibility to oversee the securities markets and develop regulatory programs regarding institutional investors.

Slightly more than 1 month after the IIS report was released, SEC Commissioner Richard B. Smith testified before the House Committee on Banking and Currency with respect to the Banking Reform Act of 1971. He criticized the bill's disclosure provisions as being too limited on the ground that they only required annual reports of aggregate bank holdings, not transactions in securities as well. Moreover, he characterized the SEC as having "the broadest regulatory responsibilities over public securities markets," 10 and as the most logical agency, rather than the FDIC, to serve as a central depository for information.

As an observer for the executive branch of government, concerned that different financial institutions are subject to a more searching level of disclosure than others, the Hunt Commission recommended ii

PA S. 2683, 93d Cong., 1st sess. (1973).

10 Hearings on H.R. 5700 before the House Committee on Banking and Currency, 92d Cong., 1st sess., pt. 1, at 114, 123 (1971) (statement of Richard B. Smith, then Commissioner of the Securities and Exchange Commission).

11 Report of the President's Commission on Financial Structure and Regulation at 102 (1971) ("Hunt Commission Report").

that corporate fiduciaries be required to file with "the appropriate regulatory agency" 12 a report detailing: (1) the 20 largest stock holdings, in terms of market value, unless they do not exceed $10 million; (2) all holdings which constitute 5 percent or more of the outstanding shares of a corporation registered with the SEC; (3) dollar values with respect to each holding broken down into categories reflecting the degree of voting responsibility; (4) interlocked officers or directors with portfolio companies where the bank had sole voting responsibility; and (5) instances where the bank voted against management

Following these strong endorsements of the concept of disclosure by institutional investors, others began advocating the need for immediate legislative implementation. Kenneth J. Bialkin, chairman of the Subcommittee on the Investment Company Act of 1940 of the American Bar Association's committee on securities, criticized the disparity in reporting the investment activities of investment companies and other institutional investors.13 Paul Kolton, chairman of the American Stock Exchange, suggested that financial institutions adopt voluntary guidelines covering "the periodic disclosure by institutions such as insurance companies, pension funds, banks, college endowments, of information relating to their activities and holdings. in the markets similar to mutual fund disclosures." 14 The Senate Subcommittee on Securities in its securities industry study noted its belief that "[T]he SEC should obtain regular and comprehensive information regarding institutional transactions which contribute to unusual price movements, so that it will be continuously in a position to impose or recommend appropriate restrictions [on institutional trading] if they are required.'

9 15

On April 25, 1973, former SEC Chairman G. Bradford Cook first announced the possibility of a legislative program by the SEC to require institutional disclosure.16 Thereafter, Representative John E. Moss, chairman of the Subcommittee on Commerce and Finance of the House Committee on Interstate and Foreign Commerce, stated that this legislative program was "of the utmost importance,

" 17

as

12 Many people analyzing this section of the Hunt Commission report have noted the difference in its use of the singular and plural with respect to the responsible regulatory agency. While the recommendations with regard to bank trust examinations used the plural, the disclosure recommendations used the singular, apparently referring to a single administrative agency. Thus, it had often been assumed because the reference was not explicit that the Hunt Commission had endorsed either the SEC or the FDIC as "the appropriate regulatory agency." But see Miller, Current Developments in Trust Supervision, 111 Trusts and Estates 268 (1972), at 341: "The reports [required by the Hunt Commission] would be filed with us [Comptroller of the Currency], and we should see them. Obviously, this would require the [sic] increase in the staff of the Washington office." 13 Bialkin, Banks and Investment Managers as Institutional Investors, 89 Banking L.J. 883 (1972).

14 Address by Paul Kolton, chairman of the American Stock Exchange, before the Institutional Investor Conference, New York City, Mar. 22, 1973, at 7.

15 Report of the Subcommittee on Securities, Senate Committee on Banking, Housing, and Urban Affairs, 93d Cong., 1st sess., Securities Industry Study, 12 (committee print 1973). 18 "Democracy in the Markets," an address by then SEC Chairman G. Bradford Cook before the Economic Club of Chicago, Apr. 25, 1973, at 20-22. See also "The Big Enforcement Cases: Their Impact on Investor Confidence." an address by then SEC Chairman G. Bradford Cook before the Society of American Business Writers, New York, N.Y., May 9,' 1973, at 8-10; "1973-A Challenge To Innovate," an address by then SEC Chairman G. Bradford Cook before the Investment Company Institute, Washington, D.C., May 10, 1973, at 9-11; "The Need for Cooperation Between the Banking and Securities Industry," an address by SEC Commissioner John R. Evans before the Utah Bankers Association, Sun Valley, Idaho, June 27, 1973, at 13-15; "Institutional Investors and the Securities Markets: A Regulator's View," an address by SEC Chairman Ray Garrett, Jr., before the New School for Social Research, New York, N.Y., Jan. 26, 1974.

17 Address by Representative John E. Moss before the National Association of Securities Dealers, Washington, D.C., June 22, 1973, at 6–7.

did Senator Edward Brooke during the floor debate on S. 470.18 Donald Regan, chairman of Merrill Lynch, and John C. Whitehead, a Goldman, Sachs partner and chairman of the Securities Industry Association, added the prestige of their positions to the mounting demands for institutional disclosure. 19 And on August 7, 1973, a large Chicago bank made an unprecedented disclosure of its trust department's stock portfolio.20

LEGISLATIVE AND OTHER RESPONSES TO THE CALL

In apparent response to this evidence of public concern, and perhaps to fortify his committee's jurisdiction," Senator Harrison A. Williams, Jr., introduced S. 2234, the Institutional Investors Full Disclosure Act, on July 23, 1973." That bill would require quarterly disclosure from "institutional investment managers," dealers, and exchange members of their securities holdings and all of their equity securities transactions of at least 2,000 shares or 1 percent of a corporation's outstanding shares, whichever is less. An "institutional investment manager" is defined to include banks, investment companies, investment advisers, insurance companies and their separate accounts, employee benefit plan trust funds, organizations exempt from taxation under section 501 (c) of the Internal Revenue Code of 1954, organizations operated for the benefit of Federal, State, or municipal employees, and any other collective investment vehicle. The disclosure provisions apply to any institutional investment manager with investment discretion or authority over accounts aggregating $10 million, and any dealer or exchange member with a trading or investment account of $5 million. A definition of "investment authority" is provided in the bill, and the SEC is given broad power to exempt certain institutional investment managers, their reports, or any class of transactions.

18 119 Cang. Rec. S11369 (daily ed., June 18, 1973) (remarks of Senator Brooke): "I am advised that *** the [SEC] will soon be forthcoming with new legislation to require frequent and complete disclosure of institutional holdings and trading activities, irrespective of whether or not an institution is an exchange member. I urge the Commission to speed the drafting of this legislation, and I hope that our committee can give it prompt and expeditious treatment when it is submitted."

19 Merrill Lynch Joins Backers of Curbs on Institutions." Wall Street Journal, May 22, 1973, at 3; "Are the Institutions Wrecking Wall Street?" Business Week, at 58, 64 (June 2, 1973) (quoting Mr. Whitehead): "[T]he most important recommendation of the [IIS report] was that there should be legislation requiring the institutions to disclose their holdings and trading every quarter. How anyone cna oppose this sort of essential information gathering is beyond me.' 20 Continental Ill. Lists Top 50 Stock Holdings," Chicago Tribune, Aug. 7, 1973. 21 Senator Lloyd Bentsen's Subcommittee on Financial Markets of the Senate Finance Committee was set up to study the impact of institutional investors on the securities markets. "Senate Unit To Study Tax Changes To Spur More People To Invest in Common Stocks," Wall Street Journal, July 27, 1973, at 21. However, instead of focusing on disclosure, Senator Bentsen's endeavor was apparently aimed toward putting substantive trading and holding restrictions on the large bank trust departments. See "Hearings Before the Senate Subcommittee on Financial Markets of the Committee on Finance," 93d Cong., 1st sess., pts. 1 and 2 (committee print 1973). That committee is now considering S. 2842, the Stockholders Investment Act of 1973, a bill introduced by Senator Bentsen on Dec. 20, 1973, which would amend the Internal Revenue Code of 1954 to impose limitations on institutional holdings of securities and to encourage individuals to invest in securities: S. 2842, 93d Cog., 1st sess. (1973). During hearings on the bill in February 1974, the banking industry generally opposed the bill while the securities generally supported it. Compare Egan, "Bankers Oppose Proposal To Limit Pension Investments Concentration," Washigton Post, Feb. 6, 1974, at D9, with Egan, "Graduated Capital Gains Tax Backed," Washington Post, Feb. 7, 1974, at F2. See "Hearings on S. 2787 and S. 2842 Before the Senate Subcommittee on Financial Markets of the Committee on Finance," 93d Cong., 2d sess. (committee print 1974).

22 S. 2234. 93d Cong., 1st sess. (1973); 119 Cong. Rec. $14300-$14302 (daily ed.. July 23, 1973).