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. A 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

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

11

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." 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,' as

19 17

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 Commisslon] 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." Bialkin, Banks and Investment Managers as Institutional Investors, 89 Banking L.J. 883 (1972).

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

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). "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.

"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, 21 Senator Harrison A. Williams, Jr., introduced S. 2234, the Institutional Investors Full Disclosure Act, on July 23, 1973.22 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. 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-S14302 (daily ed.. July 23, 1973).

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

8. 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. 28

20 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.