23

On October 5, 1973, the SEC transmitted to Congress its proposed legislation requiring institutional disclosure. Like S. 2234, the SEC bill is an amendment to section 13 of the Securities Exchange Act of 1934, but it differs from S. 2234 in several significant respects. First, the holdings cutoff test for jurisdiction is set at $100 million of equity securities in accounts over which the investment manager has investment discretion or authority. Use of an equity security measure would appear more appropriate, as distinguished from debt and equity securities, where the principal focus of the legislation is on the equity securities markets. Second, the SEC bill sets the transactions to be reported by an investment manager at $500,000. Fewer transactions would be reported under this limit than under the S. 2234 cutoffs of 2,000 shares or 1 percent of the outstanding securities. Third, the SEC bill would require that reports be submitted with aggregated information by type of account, and specifically provides for confidential treatment where the information submitted would identify the securities holdings of any natural person.

Finally, on April 4, 1974 Representative Moss introduced H.R. 13986, the Institutional Disclosure Act.24 Like S. 2234 and S. 2683, H.R. 13986 would also amend section 13 of the Securities Exchange Act, but it differs only in relatively minor and nonsubstantive ways from S. 2683, the Commission's bill.

The "other" response to the call for institutional disclosure came, surprisingly, from the Comptroller of the Currency, who recently adopted disclosure amendments to regulation 9.25 The disclosure amendments would require national banks to disclose certain of their securities holdings and transactions. Specifically, the Comptroller's proposed amendments would require any national bank holding equity securities in its trust department with an aggregate fair market value of $75 million or more to file with his office: (1) An annual report setting forth certain specified information concerning holdings of equity securities for which it acts as trustee, executor, administrator, or guardian (whether or not it has investment authority), and any other accounts over which it has investment authority either alone or with others; and (2) quarterly reports setting forth certain specified information with respect to the purchase or sale during the quarter of any equity security having a fair market value of $500,000 or more, or involving 10,000 shares or more. The required annual reports would not include information with respect to any equity security, the aggregate holding of which was 10,000 shares or less, or the assets of any investment company to which the reporting bank provides investment advice or counsel. The Comptroller would have discretion, upon written

S. 2683, 93d Cong., 1st sess. (1973); 119 Cong. Rec. S20142, S21060-S20161 (daily ed., Nov. 9, 1973). The president-elect of the American Bankers Association's Trust Division has announced that the ABA would support disclosure of bank investment activities to the SEC. "Bank Association Backs Bill on Disclosure of Trust Holdings by Banks," 221 BNA Sec. Reg. & L. Rep. A-7 (Oct. 3, 1973).

"H.R. 13986, 93d Cong., 2d sess. (1974). See Egan, "Self-Regulatory Board Is Proposed To Run Any Central Market System," Washington Post, Apr. 5. 1974, at D10 (quoting Representative Moss): "Institutions continue to play an ever-increasing role in our Nation's securities markets. The questions of concentration of wealth and market impact raised by this phenomenon can be addressed only if we know what these institutions own, and how they trade."

39 Fed. Reg. 28144 (Aug. 5, 1974), amending 12 C.F.R. § 9 (1973). "Disclosure Rules for Trust Units of Banks Are Set," Wall Street Journal, Aug. 1, 1974, at 18. Earlier, the Deputy Comptroller of the Currency for Trusts had suggested that a good case had not yet been made for the collection and publication of data on certain bank trust department investment activities. Miller, "Fiduciary Guidelines for the Seventies: Where Are We Headed?" 110 Trusts and Estates, 741, 742 (1971).

request, to keep confidential any information which would identify the holdings of assets of any natural person, trust, or estate, and to keep confidential temporarily any transactional data which would reveal an investment strategy.

CRITICISM OF THE RESPONSES

To evaluate the merits of the various responses, one must again return to the underlying justification for requiring institutions to disclose holdings and transactions. Thus, if one is primarily concerned with the potential abuse of economic power by institutions, which is essentially an antitrust (or antifraud) enforcement or investigatory approach, then one could criticize all three bills and the Comptroller's proposed amendments on the grounds that they do not include all institutions within the reporting mechanism, and, even as to those institutions which would be subject to the reporting requirements, those institutions would report too little information. For example, the Comptroller's proposed amendments would provide useful information only about holdings over 10,000 shares and transactions over 10,000 shares in equity securities for managed accounts. Similarly, all the disclosure programs would require reporting only of equity security transactions. Although other investment areas-such as bonds, money market instruments, or real estate-may be highly institutional and thus, perhaps, not raise investor protection problems as to individual investors, is that distinction compelling if one is concerned with the potential abuse by institutions of their economic power? Wouldn't it be just as important to have an institutional disclosure system containing transaction and holding information regarding all investment areas, rather than just equity securities, to provide a centrally located data base for governmental and private sector analysis of the power generated by all such economic relationships?

Beyond concern with potential abuse by institutions of their economic power, there would be another important benefit of expanded coverage of institutions and expanded coverage of other types of investment choices. As the author of a note in the current issue of the Yale Law Journal 26 persuasively argues, institutional disclosure would help the consumer of investment management services identify those portfolio managers who could best meet the consumer's individual specifications of risk and return. The note further states that the incremental cost to institutions of providing such expanded data should not be significant because virtually all institutions presently have such data stored in their computers for their own use." However, there would be the one-shot costs for institutions of creating computer programs to retrieve the data to be reported in a processable form that is consistent and uniform among all institutions; these costs, I believe, should also be borne by the institutions because they are in the best position to pass such costs through most effectively to the persons who will be most advantaged by publication of the investment data.2

28

28 Note, the Institutional Investor Disclosure Act: An Analysis of the Consumer Benefits, 83 Yale Law Journal 1271 (May 1974).

27 Id., at 1288.

28 While it could be argued that the SEC should bear the one-shot and/or the incremental costs of establishing the disclosure system, it would probably create significant budgetary problems for any independent regulatory agency, and the costs would then have to be borne, ultimately, by all U.S. taxpayers, many of whom may receive only indirect benefit from institutional disclosure through improved management of their pension funds.

On the other hand, if one's concern were with impact of institutions on the equity securities markets, S. 2683, of the three institutional disclosure bills, would appear to offer a disclosure program best geared to extract pertinent data from the larger institutions. One might question why there is a need to study and analyze matters which were studied and analyzed exhaustively by the IIS report. There are two principal answers to that question. First, the data collected by the study group started becoming stale on the day the report was published, providing a still photograph of the securities markets and the financial institutions as of the late sixties. However, the securities markets and the behavior of institutions are dynamic, not static. The IIS report, therefore, has become less and less useful as a source of information and analysis for current decisionmaking. Continuing study and analysis is required, and, to be useful, such work must be performed with reasonably current data.

A second reason is the interest of others in studying and analyzing this type of data. Increasingly, events which occur in the equity securities markets are blamed on institutions. If, as happened quite recently with Polaroid, the stocks price drops dramatically one day, it is frequently charged that large institutions have concurrently sold the stock, have monopolized trading opportunities, and have generally manipulated the market for their benefit. Without continuous institutional disclosure data, such charges can neither be proved nor disproved; proposed restrictions on the holding or trading restrictions on large institutions presently must be considered in an atmosphere devoid of hard facts.29 As representatives of First National City Bank have recently suggested, secrecy, even where there is nothing malevolent to hide, breeds distrust, while full disclosure of the facts could dispel fears and tend to resolve allegations of abuse.30

Both for the purposes of Commission study and analysis by members of the private sector, it is imperative that there be a central repository for the institutional disclosure data. A central location is necessary to collect, process, review, and disseminate the data in an efficient manner. While it might be argued that several different locations could serve the purpose, assuming each were equally efficient, that argument ignores the practical fact that diverse groups would be interpreting the same rules or regulations, and would probably give inconsistent or contradictory advice. The SEC has by far the greatest interest in institutional disclosure data, and has the expertise and experience with disclosure matters to design and administer an efficient, centralized repository of institutional disclosure data. A comprehensive, uniformly prepared data base is clearly in the national interest, the interests of the public investor, institutions, other Federal regulatory agencies, and analysts from the private sector. Moreover, S. 2683 would provide the SEC with rulemaking authority to raise or lower the jurisdictional test from $100 million, but in no event lower than $10 million. Thus, one would expect the Commission over time to expand or contract the jurisdictional test to subject that number of large institutions to the reporting requirements which would provide a sufficiently broad picture of the equity

See note 21 supra.

Hearings on Corporate Disclosure Before the Subcommittee on Budgeting, Management, and Expenditures and the Subcommittee on Intergovernmental Relations of the Senate Committee on Government Operations, 93d Cong., 2d sess.. pt. 1 at 34, 35 (committee print 1974)_(remarks of George M. Lingua); Heilshorn, the Case for Trust Department Disclosure, Trusts and Estates 428 (July 1974).

securities markets through their disclosure reports to permit the Commission to consider more effectively the public policy implications of equity securities trading and securities holdings of institutions. For example, the extent of the so-called two-tier market, 31 or the purported desertion of individual investors from the equity securities markets, might have been discernable much earlier in time; institutional disclosure data could have improved discussions of the problem and consideration of the public policy implications. Similarly, institutional disclosure data would permit the Commission to study and monitor. the specific effects of institutional holdings and trading on the securities markets, such as the depth and frequency of block trading, the depth of the so-called fourth market, and the share acquisition or disposition techniques of different investment managers. Such studies would be of great benefit to the Commission as it develops the future structure of the securities markets.

Furthermore, beyond studies of the effect of institutional investors on the securities markets, the disclosure data would permit the Commission to study closely the characteristics of different institutional investors. All affected institutions offer comparable investment management services, yet the quality and depth of regulation of their advisory activities is dependent, in large part, upon historical accident in designating the appropriate regulating agency. Collection of disclosure data would make possible analysis of the investment operations of different institutions, perhaps leading to recommendations by the Commission to Congress and the other regulatory agencies regarding beefing up aspects of the investment advisory regulation of certain of the other regulatory agencies or legislative designation of the Commission as the common regulatory agency as to the investment management function. One often hears the rallying cry that superior competitive ability emanates from inferior, or at least unequal, regulation. Investors have a right, in my opinion, to expect that all institutions offering investment management services will be subject to reasonably similar regulation of potential abuses which inevitably flow from externalized management of economic resources.

THE COMMON THREAD

The common thread which links together the two subcommittees' disclosure report and these other legislative and regulatory efforts toward disclosure by institutions is the generally perceived and recognized need for greater disclosure of institutional holdings and transactions. Articles about the disclosure report,32 prior testimony at the hearings before these subcommittees by Congressmen and re

The phrase "two-tier market" is used to describe the situation where a few institutionally favored stocks sell at artificially high-price-earnings ratios, while the other, disfavored companies in the second "tier" sell at such artificially low-price-earnings ratios that they are virtually unable to raise additional capital through the securities markets. See, e.g., Loomis, "How the Terrible Two-Tier Market Came to Wall Street." Fortune, July 1973, at 82. But see Callaway, the "Two-Tier Market Reexamined," Wall Street Journal, Sept. 28. 1973, at 8; Rowe, "Trust Departments' Investing Minimized in New ABA Study," Washington Post, Oct. 9, 1973. at D10.

32 Keeffe, "Who Owns and Controls the Corporations?", 60 American Bar Association J. 624 (May 1974); Bradner, "Disclosure of Corporate Ownership," Trust and Estates 276 (May 1974); Metcalf, "The Secrecy of Corporate Ownership," 6 Ind. L. Rev. (1974), reprinted in 16 Corporation Practice Commission 86 (spring 1974).

sponsible Government officials,33 and other, external comments regarding the institutional disclosure legislation make plain that conclusion. While the disclosure report was addressed in large part to the need to be able to look through nominee names to real ownership, individual or institutional, of the major industrial and financial corporations, there is also a compelling need to get additional disclosure from institutions about their holdings and transactions.

Accordingly, I would urge the members of the two subcommittees, in addition to the other recommendations and legislation emanating from the hearings which will receive their support and energies, to support the institutional disclosure legislation. While it is possible in the abstract to consider the proposed amendments to the Comptroller of the Currency's Regulation 9 as being helpful insofar as they would require disclosure by national banks, the essential point is that in order for the studies mentioned above to be performed well it is necessary to have a complete data base. All of the information which should and would be collected must be gathered in a similar manner by one administrative agency if the information is to provide a uniform data base. Thus, I would also urge the members of the two subcommittees to resist all attempts to diffuse the data base by carving out specific groups of prospective respondents, thereby rendering the data base both nonuniform and incomplete.

Finally, sound investment decisions by individuals require consideration of all material facts relating to the merits of the investment. One fact generally available to institutions is intimate knowledge about the market-knowledge of which securities (and how much) are being held by other institutions. Individuals are presently unable to get access to this kind of market information, creating an inherent trading disadvantage to the individual investor. Further, if an individual decides to invest indirectly through an institutional manager, he is often unable to obtain accurate information about the portfolio strategies and relative performance of different institutions; "comparison shopping" between different investment management intermediaries is exceedingly difficult, if not impossible. Institutional disclosure would go a long way toward removing these disadvantages and impediments to individual investors, and ought to restore confidence in their ability to get a fair shake in the securities markets.

Senator METCALF. Congressman Harrington was interrupted in the middle of his presentation. His entire statement will be incorporated in the record at that point and we will also incorporate the letter that Mr. Turner was talking about and some other material that he did supply and would have been presented for the record in the course of his testimony.

Unless there is something else to come before the committee, we will recess subject to the call of the Chair.

[Whereupon, at 12:25 p.m., the subcommittees recessed, to reconvene subject to the call of the chair.]

Hearings on corporate disclosure before the Subcommittee on Budgeting, Management, and Expenditures and the Subcommittee on Intergovernmental Relations of the Senate Committee on Government Operations, 93d Cong., 2d sess., pts. 1 and 2 (committee print 1974). See, "Energy Companies' Ownership Studied," Washington Post. May 22, 1974, at A17 (Representative Aspin, SEC Commissioner Sommer); Shifrin, "FTC Staff Urges Fuller Disclosure," Washington Post, May 21, 1974, at A2 (FTC Chairman Engman).