quire issuers to take reasonable steps to identify the beneficial owners of secu rities held in street or nominee name and to make sufficient copies of proxy material available to the broker or other record holder to transmit to the beneficial owners. We recognize that these proposals would not deal with the obligations of the nominee or record owner, and we very much appreciate your suggestions for dealing with this subject. Sincerely, RAY GARRETT, Jr., Chairman. SECURITIES AND EXCHANGE COMMISSION, Re Public Fact Finding Investigation in the Matter of Beneficial Ownership, 4-175). C. V. WOOD, Jr., Chairman, The Committee of Publicly Owned Companies, DEAR MR. WOOD: For your information, enclosed is a copy of the Commission's release dated November 5, 1974, which announces the commencement of the public hearings in the above captioned proceeding and adds a new inquiry. I am also enclosing a copy of the SEC News Digest dated November 6, 1974, which identifies those witnesses who have been scheduled to appear as of November 6th. If you have any questions, please do not hesitate to call or write. Very truly yours, Mr. C. V. WOOD, Jr., The Committee of Publicly Owned Companies, DONALD J. MYERS, Counsel for the Proceedings. GENERAL DYNAMICS CORP., DEAR MR. WOOD: I do have a comment on your memorandum of November 6, 1974. The present procedure for distributing shareholder communications to the beneficial owners of "street name" stocks is a disgrace to the free enterprise system. The present procedure is about on-third as efficient as direct communication from corporation to shareholder and at least three times more expensive. I think that it sums it up pretty well. In so stating I do not mean in any way to criticize the brokerage community. Over the years we have received excellent cooperation from brokerage firms. The problem does not stem from the people who are administering the system; the problem is the system itself which is inherently inefficient and costly. By and large, stock is held in street name for the convenience of the firm or the beneficial owner. In all but a few cases, confidentiality is not a factor. I fully support the view of the Committee that the SEC should require brokerage firms and custodial nominees to the issuing company to turn over names and addresses, together with a proxy of some form authorizing the voting of all stock for which proxies from beneficial owners are received. If any street name holder prefers to keep his identity confidential, the brokerage firm or nominee should be authorized to vote without instructions. In this connection, the Committee should work to modify the proxy rules of the New York Stock Exchange and should seek such legislative relief from state legislatures as may be needed. A good place to start would be with the Delaware Corporation Law. In my career in the area of shareholder communications, which goes back over 20 years, nothing has irritated me quite as much as the restrictions which have been imposed on corporate management in communicating with street name holders. Not to mention the cost. Under New York Stock Exchange rules, we must get individual street name holders to vote on material matters, yet there is no way to gain direct access to them to be certain that they are fully informed on the issues. 2 I think the time has come to do something about it. Your proposal would be an excellent addition to the firms initiated by the SEC in the area of shareholder disclosures. Very truly yours, JOHN P. MAGUIRE, Secretary. STATEMENT OF THE AMERICAN BANKERS ASSOCIATION The American Bankers Association has a membership of some 14,000 banks which constitute approximately 96% of the banks in the United States. About 4,000 of these banks possess trust powers and virtually all of them are members of the Trust Division of the ABA. The ABA recognizes the desire of issuers and federal regulators to have greater disclosure of persons who possess investment discretion and voting authority over stocks where record title is held by brokers, banks and others. Section 4 of S.425, however, would require disclosure far beyond what is needed in the public interest and would unduly contravene the right of privacy. S.425 would inundate the SEC with information which could serve no possible public need. Therefore, the ABA urges the subcommittee to consider an alternative disclosure procedures set out below which we believe could meet the needs of federal regulators and issuers of securities and not unduly infringe on the right of privacy nor overtax the storage capabilities of the SEC. Section 4 of S.425 would require every holder of record of shares of a publicly owned company (those described in Section 13 (d) (1) of the '34 Exchange Act) for the account of another person to file reports with the issuer identifying the beneficial owners of such shares and persons other than such owners possessing sole or shared voting authority. This requirement would reach all corporate fiduciaries, all brokers who maintain accounts for customers, attorneys and others who serve as trustee if 13 (d) (1) securities are a part of the trust corpus and possibly many attorneys and others who serve as administrator or executor where 13(d) (1) securities are a part of the estate. One of the reasons for the breadth of this requirement is that the language reaches any size holding from one share to a million or more shares. Another reason is that the term "beneficial owner" is not defined. Whenever a security is held in a fiduciary capacity, such as trustee, executor, guardian or custodian, by definition some other person is the beneficial owner regardless of the extent of the discretion held by the fiduciary. Bank trust departments at the end of 1973, excluding custodian accounts, held assets in over 14 million accounts. Virtually all of these accounts would include 13(d) (1) securities and most would undoubtedly include more than one such security. Thus, setting aside individual trustees, executors and guardians and the entire broker community, it is still not difficult to envision the vast number of pieces of paper which would be generated by Section 4. It would run into the tens of millions. Requiring disclosure of "beneficial owners" raises the problem of who is a beneficial owner. Trust departments serve a variety of types of accounts, including trusts, estates, guardianships, agencies and custodianships and the problems of identifying beneficial owners may differ according to the type of account. The beneficial owner of a custodial account may be easily identified if the securities are held for a named person or persons, but if the securities are held as custodian for a pension fund or a personal trust all the problems discussed below may exist in identifying the "beneficial owner." Agency accounts would be similar to custodian accounts in that the beneficial owner may sometimes be easily identifiable, but other times there would be problems. Trusts normally would present a problem. Banks serve as trustee to pension trusts, personal trusts, both testamentary and inter vivos, and to collective trusts. In a pension trust the beneficial owners may be current recipients of benefits, current participants in the plan, persons with vested benefits but who are no longer participants, and certain beneficiaries of such persons. It is assumed that the bill does not intend to require the disclosure of these persons, but they are the beneficial owners if, indeed, there is any beneficial owner. Normally a bank trust department exercises investment discretion and voting authority over securities in a pension trust, but there are many such trusts, so-called directed trusts, where such powers are lodged in an investment manager or a “named fiduciary." In the latter case it is not clear what residual investment and voting 49-480 - 75 - 32 authority the bank trustees may have, if any. Also, in some individual account plants the power to vote may be passed through to the participants. In the personal trust area there are two basic types of trusts, the inter vivos trust, established by a person during his lifetime for any number of reasons, and the testamentary trust. Inter vivos trusts may be revocable or irrevocable. In either case there is almost always income beneficiaries and remaindermen. As an example, a person may establish such a trust, income to himself for life, then income to the spouse for life, with distribution of the corpus to the children. Also, such trusts are often set up to help care for aged parents or to educate children. In many of these cases, the bank has full authority over investments and voting. Sometimes in the revocable trust situation the grantor may retain authority to say "yes" or "no" on investments. Testamentary trusts are often far more complex. Since the grantor will not be around, he may grant to the trustee or to some other person discretion to determine who will receive income and/or who will receive the corpus. The choice may be limited to a class or it may be general. In these situations the identification of "beneficial owners," if all potential recipients of benefits were to be included, could result in a list of persons as long as the one which might be generated by a good-size pension trust. Another characteristic of testamentary trusts which should be borne in mind is that there are often co-trustees who share the investment and voting authority, as well as the administrative authority. Collective trusts would raise another problem in identifying "beneficial owners." Would it be the bank, the individual accounts holding participations, or the persons who are the "beneficial owners" of the individual accounts? Again, it is not difficult to envision the paper crunch which would be created by S. 425 if trust departments are required to identify "beneficial owners" with respect to every 13 (d) (1) security. Even if “beneficial owner" were defined in the most simple terms to require only disclosure of the account name, the task would still be enormous and what public purpose would be served? We believe bank customers would lose their right of privacy without any justifiable public benefit. The enormity of the disclosure required by this proposal may be easier to recognize by a review of the data which would be generated by some specific banks. Mercantile-Safe Deposit and Trust Company (trust assets about $3 billion) in its Trust Division Annual Investment Report 1973 listed 70 securities holdings over $5 million. The Report also stated the market value of each holding and the number of accounts in which the stock was held. IBM was the largest holding, with a market value of over $108 million, and it was held in 3801 accounts. Exxon was the second largest holding, with a market value of over $95 million, and it was held in 5096 accounts. General Motors was the thirteenth largest holding, with a market value of over $29 million, and it was held in 4197 accounts. AT&T, the fifteenth holding, was held by 4216 accounts and Baltimore Gas and Electric Company, the forty-third largest holding, was held in 2357 accounts. The entire list is attached as Appendix "A." Some of these stocks, of course, are held in much fewer accounts. Mercantile-Safe Deposit, under S. 425, would have to report information to IBM on the benefiicial owners of 3801 accounts, Exxon would receive information on the beneficial owners of 5096 accounts, General Motors, 4197 accounts. Baltimore Gas and Electric, 2357 accounts, and on through the remainder of the companies in which stock may be held. According to a survey conducted by the ABA in 1973, there could well be 3000 such companies. To move to a larger bank, First National City Bank has reviewed its ten largest holdings, with these results: IBM is held in 5421 accounts, Xerox is held in 3687 accounts and Kodak is held in 3216 accounts. General Electric, its sixth largest holding, is held in 2587 accounts and Exxon, its tenth holding, is held in 2862 accounts. Again, some stocks-even those in the top ten-are held in fewer accounts, but when you multiply the number of accounts (information would have to be reported on each) by the number of companies (in Citibank's case it may be 8000 to 10,000), the stack of paper involved becomes quite clear. Morgan Guaranty Trust Company in its Report III, which disclosed its holdings on December 31, 1973, reported some 500 companies in which it held over $1 million worth of securities. A telephone survey was made of three banks outside New York City and each reported holding the equity securities of over 5000 companies. Attached as Appendices "B" and "C" are some figures from Chase Manhattan Bank and Bankers Trust Company. The Association believes with these facts it is reasonably easy to comprehend the volume of paper which would be created and the extent to which individual privacy would be invaded if issuers were informed of all beneficial owners and they, in turn, passed these data on to the SEC. The only safeguard contained in the bill against invasions of privacy is the sheer mass of paper being created. This mass, however, also reduces, if not precludes, any value the information might have for corporate regulatory purposes. The ABA recognizes the desire of companies to communicate with the persons who vote their stock or make investment decisions with regard to it. We also recognize the interest of the government in identifying substantial holders of such authority in the case of regulated companies. But, in neither case is there any purpose served by disclosing beneficiaries of accounts who neither vote the stock therein nor have any voice as to investments. Also, there would seem to be little public purpose served by requiring the disclosure of persons who possess or share voting or investment authority over insignificant holdings. This is particularly true when weighed against the mass of paperwork which would be involved, the cost to the government of storing the information and the infringement of individual privacy which would result. Mr. Charles Buek of the United States Trust Company of New York provided the Subcommittee some interesting statistics in this regard. U.S. Trust surveyed its holdings of AT&T, General Motors and IBM. No account held between 1/10th of 1% and 1% of the outstanding stock of any of these companies. Seventeen accounts held 1/100th of 1% of IBM. Moving to less than 1/100th of 1%, it found about 1600 accounts held AT&T, about 2300 held General Motors and about 6600 held IBM. Therefore, the ABA believes Section 4 of S.425 would not serve the public interest in that it would impose unnecessary burdens and costs on the SEC securities issuers and all record holders of securities. Our customer would suffer an undue cost in that they would lose a part of their right to be let alone, a vital part of liberty. The ABA suggests the following be considered as a substitute for Section 4: 1. The SEC would prepare annually an alphabetical list of 13(d)(1) issuers, including CUSIP numbers, and the number of shares which constitutes 2% of their outstanding voting shares. Such a list would be made available in print and on magnetic tape. 2. A record holder of 2% or more of the outstanding shares of an issuer on July 1 would notify such issuer by August 1 of the number of shares over which it possesses sole or shared voting authority and/or investment discretion. It should be understood that this aggregation of shares in various accounts is solely for the purpose of identifying statistically who possesses investment and voting authority and in no way indicates that the authority is not exercised separately and distinctly for each account, taking into consideration the needs of the beneficiaries of that account. 3. If on July 1 a record holder holds in any one account 2% or more of the outstanding shares of an issuer and if a person or persons, other than the record holder, possesses sole or shared voting authority or investment discretion with respect to such shares, the record holder would file a report with such issuer by August 1 containing the names of such person or persons and his or their residence, provided that no such information would be reported with respect to a person who possesses sole or shared voting authority or investment discretion over less than 2% of such outstanding shares. If the issuer wants or needs additional information regarding such person or persons, the issuer could make direct contact. 4. The record holder would not have to file information which is identical to that already on file with the issuer. 5. Each issuer would file a report on a confidential basis with the SEC by September 1 containing the name and residence of any person: (a) who on July 1 was a record holder of 2% or more of its outstanding voting shares, or (b) who on July 1 possessed sole or shared voting authority or investment discretion over 2% or more of its outstanding shares. Such report would contain the number of shares held of record and the number of shares over which sole or shared voting authority or investment discretion was held. 6. Any issuer that files similar information with another government agency would be exempt from the requirement of 5. 7. Any information filed under 5 would be available to Congress and to other federal agencies and departments as necessary to carry out their functions and responsibilities. 8. It would be unlawful for any government employee to divulge any information filed pursuant to 5 other than in compliance with 7. Congress might consider allowing a person who would be identified by a report filed under 3 by a record holder to remain anonymous and thus retain his right of privacy if the person agrees to forfeit the right to vote his shares. Under such circumstances the number of outstanding shares for voting and attendance purposes at an annual or special shareholders meeting should be reduced by that number of shares. In other words, if a person is investing in companies for investment purposes only and agrees to forgo any exercise of voting power, the person may retain his privacy. The ABA welcomes the opportunity to present this statement and offers its assistance in any way to the Subcommittee and its staff. APPENDIX A MERCENTILE-SAFE DEPOSIT & TRUST CO.-TOTAL HOLDINGS IN EXCESS OF $5,000,000 OF MARKET VALUE [Key: I, income; B, balance; G, growth; S, special situation] |