December 12, 1974
Page 39425
SENATOR METCALF TESTIFIES ON CORPORATE DISCLOSURE
Mr. MUSKIE. Mr. President, earlier this year the Subcommittee on Budgeting, Management, and Expenditures and the Subcommittee on Intergovernmental Relations held a broad series of hearings on corporate disclosure. These hearings resulted from the joint study, "Disclosure of Corporate Ownership," published a year ago by the two subcommittees under the leadership of Senator LEE METCALF.
This week Senator METCALF testified at a hearing on information collection and disclosure conducted by the Securities and Exchange Commission in connection with the SEC fact-finding investigation in the matter of beneficial ownership takeover and acquisitions by foreign and domestic persons. In his excellent statement, Senator METCALF reviewed the subcommittees' own hearings as well as the significant actions and reforms which a number of Federal regulatory commissions are undertaking to improve the quality of corporate disclosure.
I commend Senator METCALF for his persistence and leadership in this field, and ask unanimous consent that his testimony before the SEC be printed in the RECORD.
There being no objection, the testimony was ordered to be printed in the RECORD, as follows:
STATEMENT BY SENATOR LEE METCALF
I am pleased to have this opportunity to appear before the Securities and Exchange Commission.
I warmly commend this Commission and its staff for the hearing and investigation you are conducting regarding fundamental aspects of information collection and disclosure.
We have conducted many days of hearings on such matters in the Government Operations Committee. As our hearings developed, Members and witnesses realized that little if any new legislation was needed to make substantial changes in corporate reporting requirements.
Congress long ago gave extraordinary powers to the independent regulatory commissions, which were timid about using them. It was this lack of commission action, and failure of Congress to exercise diligent oversight, which led to grossly inadequate and misleading filings regarding ownership and control of corporations, the area of disclosure on which our hearings focused.
However, the commission response and activity this year has been remarkable.
The Civil Aeronautics Board initiated an investigation into various aspects of control over air carriers by financial institutions. The CAB also compiled and published for the first time the thirty top stockholders in regulated air carriers.
The Federal Power Commission went to rule-making to obtain information on debt holdings and interlocks in utilities it regulates. The FPC also went to rule-making on its proposal to require identification of the thirty top stockholders in major utilities, rather than just the top ten.
The Federal Trade Commission had its lawyers review their statutes and they discovered ample, unused, long-dormant authority to collect information on ownership and control. The FTC is now drafting such regulations.
The Federal Communications Commission is about to propose revisions in its reporting requirements, but is waiting for the recommendations of the Steering Committee on Uniform Corporate Reporting which is nearing completion of its initial task, and to which your Mary Beach has contributed so much.
And I want to mention what is going on at the interstate Commerce Commission. I know that the ICC is a candidate for abolition. Possibly that explains its remarkable improvement in corporate ownership reporting.
The SEC will benefit from these ICC reporting improvements, inasmuch as some of the ICC filings are included in reports to the SEC. I walked over here to the SEC three years ago, to look at the ownership data on one of my constituents, the Burlington Northern, which is the country's biggest railroad and coal company, and one of the biggest land, timber and mineral companies as well. I was frankly amazed to see that the list of the thirty top stockholders in your files was a meaningless list of nominees. This was on the ICC ownership form which was included in the SEC's 10-K report.
The BN's ownership report to the ICC and SEC last year was no better. Eleven of the railroad's "top thirty" security holders were nominees for four banks. None of the banks were even mentioned. No street address or box number for the nominees – most of them in New York – were listed.
This year the ICC has required the railroads to translate the nominee accounts into the names of the institutional investors they represent and aggregate the holdings of each large investor. The railroads are also obtaining from banks and brokers, and providing the ICC, identification of whoever has the voting rights to major blocks of stock in custodial and street name accounts.
This information is being obtained by the ICC not only without subpoena, but without rule making. The ICC is simply redefining and enforcing reporting requirements.
The Federal Maritime Commission, I would add here, is also this year requiring reporting companies to file reports on their top thirty security holders in the name of the party empowered to vote the stock, and to aggregate accounts for reporting purposes.
One of the principal suggestions in my eleven October letter to your Commission was that it collect and publish information regarding the voting rights of the thirty largest stockholders empowered to vote. I want to expand on that issue.
First, percentage reporting benchmarks of ten, five or even one per cent are simply insufficient to obtain the information bearing upon control. The most recent reiteration of this point is in the decision in the Rock Island case, this month, by the Interstate Commerce Commission. That commission stated that control of a corporation can result from ownership of less than one per cent of the stock of a widely held company
Secondly, stockholders for their own protection – and the SEC is mandated to protect stockholders – are entitled to know who is empowered to vote the major blocks of stock in "their" companies, so they can express themselves to the controlling interests. Stockholders should be able to know who the decision-makers are, and to get in touch with them well in advance of annual meetings, in order to obtain consideration for their proposals or candidates for the board of directors. I like, and commend to you, the suggestion of Professor David L. Ratner, a consultant to and witness before our Subcommittees, that the names and addresses of those institutions or individuals empowered to vote consequential blocks of stock in a company be included in annual reports to stockholders.
You are the experts on the complicated procedures of corporate voting, including management discretion to omit proposals from proxy statements, the delays or failures to get out ballots, the requirement that a proposal receive certain percentages of the vote to be again considered. I am relieved that Congressional elections are not subject to the same handicaps.
If we believe what many of us say about working for change within the system there is a concomitant responsibility to enable stockholders to participate meaningfully and conveniently in the exercise of their rights. The authority and responsibility are right here, at the SEC. I hope that you will consider adoption of Professor Ratner's and my suggestion.
Third, company management is also entitled to know who controls their companies. Some of the most impressive testimony and letters to Senator Muskie's and my Subcommittees have come from the chief executive officers of small and medium-sized companies who cannot now determine that information and communicate with their owners.
Their testimony was printed just this week. It appears in Part Three of our hearings on corporate disclosure. I will provide copies for your use.
I refer you especially to the testimony of Norman J. Fischer, board chairman of Medalist Industries, a Wisconsin firm. It begins on page 175. He describes how his company's efforts to inform and disclose information to shareholders "are blunted and made impossible by incognito and blind securities registration". He has also filed material with your Secretary Fitzsimmons.
In Appendix G there is a letter from Carl W. Swan, president of Basin Petroleum Corporation, in Oklahoma, who simply wants to be able to communicate with his shareholders. Also, in Appendix G, you will find letters from the stock exchanges and Depository Trust, regarding the problems of Mr. Fischer of Medalist Industries.
Mr. Fischer testified that "sometimes I think the SEC should get lawyers to tell them how to do things instead of what they can't do." I hasten to add to his point, that he not be misunderstood – he likes you. And I add my point that I recognize what you and your lawyers – and non-lawyers – are doing to improve reporting.
Depository Trust is also cooperating fully – it is just as interested as we are in seeing that "Cede & Co." does not appear on ownership report forms as a major stockholder, with voting rights, inasmuch as it does not have voting or discretionary rights.
My four point deals with the increased accuracy of ownership reports that deal with aggregated holdings of a number of stockholders, rather than a percentage of the stock
A couple of years ago I asked a number of large companies to provide me with a list of their 30 major stockholders. Three airlines – Northwest, United and Western – all reported that Chase Manhattan held more than six per cent of its stock. Yet none of those holdings were reported to the CAB, which had a five per cent reporting benchmark. The reason was that the bank held the stock in two or more nominee accounts, none individually amounting to five per cent.
This year, as I mentioned earlier, the CAB compiled a list of the 30 top stockholders in regulated air carriers. (It appears in Appendix D, Part Three, of the Corporate Disclosure hearings.) The example I will use, Eastern Air Lines, was typical of most airlines and, in fact, most large corporations. The major blocks of stock were held by a few New York banks and brokerage houses. Only one individual was listed. He was Stockholder Number Thirty, with fifty thousand shares, about one fourth of one per cent of the outstanding shares.
This individual was not Laurance Rockefeller who, according to other sources, is a major stockholder in Eastern. My staff asked the CAB to explain the discrepancy.
The CAB advised that Eastern initially reported that Mr. Rockefeller was stockholder Number Twenty One, with forty nine thousand, four hundred shares of stock. But Eastern had not aggregated the holdings of brokers, held in the name of Cede & Co., to the accounts of institutional investors which had some of their stock with Cede and some in their own accounts.
The Cede & Co. increments to the accounts of other institutional investors barely squeezed Mr. Rockefeller off the "top thirty" list.
Then the CAB looked elsewhere in its own files, and in your files, and they found that Mr. Rockefeller had reported holdings of one hundred and twenty five thousand shares of common stock – two and a half times as much as showed in Eastern's books. Mr. Rockefeller also reported holding more than two hundred thousand shares of preferred, and the CAB found that this stock carried voting rights. So now the CAB says that Mr. Rockefeller is Stockholder Number Seven in Eastern, with more than a quarter of a million shares of stock.
So, in summary, my fourth point is that ample allowance should be made for the operation of Murphy's Law – if anything can go wrong, it will. But despite the several problems recited in the Eastern example which I use, problems due to failure to aggregate and to put in one place all the information scattered around two agencies, the thirty top stockholder requirement led to what now appears to be an accurate reporting of the holdings of a major stockholder in a major regulated company. (The correspondence with the CAB on this matter appears in the Congressional Record for Thursday, December 5, beginning on page 38356.)
This brings me to my final point, the work of the steering committee on uniform corporate reporting, with which some of you are of course familiar.
This committee grew out of suggestions during our hearings this year. It is composed of staff persons from the General Accounting Office, from our two subcommittees, and from the independent regulatory commissions which collect, or plan to collect, information on corporate ownership and control.
This group is putting the finishing touches on proposed model reporting requirements dealing with four areas – corporate structure, voting stock ownership, affiliations of officers and directors and debt holdings. This committee will soon have a proposal ready for consideration by your commission and the other participants. They are the CAB, FCC, FPC, FMC, FTC, and ICC. The GAO is participating pursuant to its responsibilities for coordination of reporting requirements of the independent regulatory commissions.
I am told that this committee has spent almost as much time on the matter this fall as I have spent in strip mining mark-up. I am impressed with the way in which this unique venture is progressing and sincerely hope that you and the other commissions will give it prompt consideration.
There are advantages to business, commissions and the public in having uniform reports, conveniently available.
A number of companies have to report ownership and control data to several commissions. It would reduce the burden on business to fill in one report acceptable to all the commissions. Even your own staffs, and my staff, with their expertise find it difficult to pull available information together. The public gets lost in the maze. I know from our colloquy on this subject during the hearings on regulatory reform last month that Chairman Garrett is as concerned about this point as I am.
So I hope that you and other commissions can agree on standard reporting requirements in these four areas in which the steering committee is working. Much more important than definition of beneficial control, in my opinion, is the mere reporting of the facts regarding the various levers of control, in response to clear questions and instructions that do not permit evasive answers. And of course commission follow-up will be necessary to be sure that misinformation or improper responses are not simply filed and forgotten.
Each commission could of course decide what companies, or groups of companies, to which the uniform reporting requirement should apply. I do not know of any intent or desire to add to the burden of small business as regards Federal reporting requirements. But a uniform corporate ownership and control requirement for large companies and regulated monopolies, coupled with improvements in public access to the information, would be a major step forward in regulatory responsibility, in my opinion.
And if the Government Printing Office or the commissions choose to publish this information it would probably be a best seller.
Thank you for your consideration.