February 7, 1974
Page 2662
MORGAN GUARANTY TRUST'S RESPONSE TO DISCLOSURE OF CORPORATE OWNERSHIP
Mr. METCALF. Mr. President, last month the Committee on Government Operations published the committee print, "Disclosure of Corporate Ownership." This study has evoked lively interest in an important subject.
A principal conclusion of the study, as stated by Senator MUSKIE and me in our introductory remarks, as chairmen of the two subcommittees participating in the study, is as follows:
Neither companies nor ordinary stockholders have information which they need to protect their own interests regarding stock ownership and the personnel and business relationships between portfolio companies and institutional investors, principally banks. The Federal Government does not have sufficient information in these areas upon which to base reasoned public policy. Much of the information collected by Federal agencies regarding stock ownership, displayed in public files and shared with State agencies and the public, is meaningless or misleading despite the clear policy stated in the Federal Reports Act of 1942 that information collected by Federal agencies should be tabulated so as to "maximize the usefulness of the information to other Federal agencies and the public."
The information needed regarding the several levers of corporate control is held by a few institutional investors, principally six super-banks headquartered in New York. These institutional investors have the capacity to report their holdings quickly and fully. Similar reports on personnel and business relationships with portfolio companies would be even easier to make.
Congress and some Federal commissions have on occasion established limits on institutional levers of corporate control, principally regarding stockholders. But neither the Congress, nor the commissions, nor the executive branch can fully evaluate the total effect of concentration – the impact of the several levers of corporate control exercised by banks and other major investors throughout industry groups and the economy as a whole.
Meanwhile, the portfolio companies in which a few banks have substantial influence make many decisions affecting public policy. Oil companies deal with foreign nations regarding oil supply and cost. Pipeline companies deal with the Soviet Union for natural gas. Utilities exercise the right of eminent domain. Milling companies and the Soviet Union arrange grain sales which sharply affect domestic price, supply, transportation, and storage. These are momentous public issues in which Federal officials play a minor role, much of it after basic decisions have been agreed upon by American companies and foreign governments.
Recently I received a letter regarding the study from the chairman of the board of Morgan Guaranty Trust, Ellmore C. Patterson. He shared his letter from some Members of Congress and the press. Inasmuch as persons who received his letter, and others, may be interested in my response, I ask unanimous consent to print in the RECORD my February 4 letter and the enclosures I sent to him.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
JANUARY 23, 1974.
Senator LEE METCALF,
Chairman,
Subcommittee on Budgeting, Management and Expenditures,
Committee on Government Operations,
U.S. Senate Office Building,
Washington, D.C.
DEAR SENATOR METCALF: I am writing to you to express my concern over the manner in which the Senate Subcommittee on Budgeting, Management, and Expenditures recently announced to the press the publication of a report titled "Disclosure of Corporate Ownership."
The release states that the listing of nominees in official corporate ownership reports hides from government regulators the fact that institutional investors, especially banks, hold the stocks which are registered in the nominees' names. That is simply not true, as even a cursory reading of your remarks printed in the Congressional Record of April 25, 1972, would have made obvious to whoever prepared the press release. As you noted in those remarks (and as the report itself notes), bank nominees and the banks they represent are identified in the "Nominees List" published annually by and readily available from the American Society of Corporate Secretaries.
Nominee registration is used by banks to speed and simplify the transfer of stock, to minimize paperwork in the receipt of dividends and the crediting of them to the parties for whom stock is held, and in general to achieve efficiency and economy in performing the various services which banks offer the public in connection with investment in stocks.
There is not and has not been for decades any real misunderstanding by anyone in government about nominees. In 1933 the draftsmen of the Securities Act were able to distinguish clearly between persons owning stock of record and persons owning stock beneficially. You yourself have been discussing the use of nominees at least since 1971, and in 1972 Professor Gerald C. Fischer of Temple University published an article in the Banking Law Journal which clearly explained the use of nominees and which noted that such use had been specifically authorized by the legislatures of virtually every state. A copy of that article, which I commend to your attention, is enclosed with this letter.
The press release implies that various government agencies have been receiving (from issuing companies, not from banks) reports as to stock holdings which are in some way rendered misleading by the fact that nominees' names are included among the holders shown. If the agencies concur in that view, it would take merely a very simple amendment of their regulations to require that reporting companies indicate, when giving the name of a nominee, the name of the bank or other institution with which it is associated.
Besides completely misrepresenting the effect of nominee registration, the press release begins by referring to "control of many large corporations by a few banks" as if such control were an established and unquestioned fact. Actually, not a shred of evidence is presented in the entire report on which the press release is based to support the thesis that any bank exercises control of the corporations discussed.
Banks are forbidden to own corporate stock for their own account, except in such unusual circumstances as stock acquired in an effort to recover on a defaulted loan. Banks hold stocks on behalf of clients and of trusts for which they are trustee. Their fiduciary obligations require them to act solely in the interests of their clients and trusts, not for purposes of gaining or exercising control of any company.
The charge in the press release, quoting from the report, that the use and reporting of nominee registration results in "a massive coverup" of institutional holdings of stock is particularly distressing to me because Morgan Guaranty Trust Company for the past two years has published and widely distributed reports listing all of the publicly traded stocks in which its holdings for trust or investment clients had market value of $1,000,000 or more. These reports were furnished two months ago to the staff of your Subcommittee, but I enclose copies with this letter in case you have not seen them. A number of other banks, especially ones with large trust departments, also make significant disclosures of their holdings.
For some time we at Morgan Guaranty, recognizing that the growing institutionalization of savings and investment in the American society carries with it important considerations of public policy, have tried to encourage reasoned discussion and analysis looking to constructive decisions taken in the public interest. In publications, in speeches, and in governmental contacts we have attempted to contribute to such discussion and analysis. It is most discouraging to now encounter the approach to the subject embodied in the Subcommittee's press release, which unfortunately but predictably resulted in highly misleading stories in many newspapers and over many radio and television stations.
I am sending copies of this letter to Senator Muskie and to other members of Senate and House committees most directly concerned with the subject and to a number of newspapers which carried stories based on the Subcommittee's press release.
Respectfully yours,
ELLMORE C. PATTERSON,
Chairman of the Board.
FEBRUARY 4, 1974.
Mr. ELLMORE C. PATTERSON,
Chairman of the Board,
Morgan Guaranty Trust Co. of New York,
New York, N.Y.
DEAR MR. PATTERSON: I have your 23 January letter in which you express your concern about the release of information regarding the committee print, "Disclosure of Corporate Ownership".
You are distressed by the reference to a "massive coverup" of institutional holdings, through use of nominees, citing your own recent compilations, provided to me last November, as evidence of significant disclosure.
You disagree with the contention in the release, and the study upon which it was based, that use of nominees in corporate ownership reports to government regulators hides the concentration of stockholdings in banks.
You contend that names of nominees and associated banks are readily available.
You state that there is not a shred of evidence in our study to support the thesis that any bank exercises control of the corporations discussed.
You state that there has not been, for decades, any real misunderstanding by anyone in government about nominees.
Two of the compilations you sent me, dealing with Morgan's voting rights to stock in major broadcast companies and air carriers, do constitute significant disclosure. I compliment you for it.
I hope that you will provide the Subcommittee (or include in your own public reports) similar information regarding Morgan's voting rights to stock in other companies which are required to submit ownership data to Federal regulatory agencies, such as the Federal Power Commission, Interstate Commerce Commission and Securities and Exchange Commission.
I would like to review for you the deficiencies, from a regulatory view point, of the annual reports of your trust and investment division, which you sent me, and of ownership information filed with government agencies by companies in which you hold stock. I believe this review may help you and your bank better understand and assist in correcting the deficiencies in the present systems.
Your annual reports on holdings do not enable the reader to distinguish between holdings which your bank is empowered to vote and those in which the bank has no voting rights. Separation of holdings into the three voting categories (sole, partial and none) would provide the information requested by regulators and needed by your portfolio companies in order to comply with regulatory requests. It would also diminish unjust criticism of banks whose holdings include large custodial accounts in which the bank has no voting interest.
Secondly, except for those companies in which your bank holdings exceed $150 million, your annual report on holdings does not state the amount of stock held in a company, in either dollar or share terms. Congress and commissions have set forth in laws and regulations various stock ownership percentages at which control of a company is presumed. (That is one of the reasons why our study did not dwell on the exercise of control.) Your listing of, for example, only the names of more than one hundred companies in which Morgan has holdings with market value of $10 million to $50 million, is therefore insufficient for regulatory purposes.
The format which you used in the separate, unpublished compilation of voting rights to stock in major broadcast companies and air carriers, if used in your public report on all holdings above $1 million, would in my opinion constitute adequate disclosure, and relieve some of the burden and expenditure of the tax-financed regulatory commissions.
The fact that I have been discussing nominees since 1971, and that Professor Fischer wrote an article about them for the Banking Law Journal in 1972, has not, alas, clarified the subject within government. And as recently as last summer the president of a firm in which your bank has holdings in excess of $1 million testified that his and other medium-size and small companies are unable to break through the maze of nominee accounts to communicate directly with their beneficial shareholders.
As understanding of the nominee system increases it becomes increasingly clear that the system, while of possible benefit to bankers and traders, presents substantial problems for the Congress and the regulatory commissions it established, and for portfolio companies and many of their stockholders.
Our study includes abundant evidence regarding the contribution of nominees to the understating of bank holdings in major industries. To illustrate the point, I cite examples involving your own bank, using current data filed with regulatory commissions.
Enclosure A is the report on "Security Holders and Voting Powers" filed last year with the Federal Power Commission by Florida Power Corporation, in which you report holdings of between $10 million and $50 million. You will note that three of the top ten security holders are nominees for your bank – Schmidt & Co., with 450,032 shares, Stawis & Co., with 154,753 shares and Carson & Co., with 142,481 shares.
Please also note that Chase Manhattan, the National Bank of Detroit, Northwestern National Bank of Minneapolis and Wilmington Trust are listed along with their nominees. Morgan, however, is nowhere mentioned in this ownership report. The addresses of two of your nominees is "Box 1508, Church St. Station, N.Y." The address of the other is Box 491 at the same Church Street Station.
The Nominee List, published by the American Society of Corporate Secretaries, is more available since I placed it in the Congressional Record, after the Society refused to make it available to the Federal Power Commission, an attorney in a rate case and an editor. If Florida Power Corporation knew about the Nominee List, why did it not identify Morgan in its ownership report? Your bank holds more than seven percent of the company's stock in those three nominee accounts.
The answer to that question should come from Florida Power Corporation. However, as chairman of the bank whose holdings in the company are veiled by three nominees, you too have an interest in this inadequate disclosure.
When the chairman of another large bank commented to me on our study, I sent him similar information regarding his bank, whose nominees were listed as three of the top stockholders in another electric utility which did not mention the name of his bank. The bank chairman checked his records and found out that his bank had stock in the company listed in eight other nominee accounts, in addition to the three that were listed among the top ten. His comment to me was:
"I certainly agree that, in terms of voting control, the current Federal Power Commission form does not provide for a full or meaningful report."
You too may wish to inquire within your trust department to see whether Morgan has other accounts in the Florida Power Corporation, and advise me of your findings.
Enclosure B is the "Security Holders and Voting Powers" report filed last year with the FPC by Southern California Edison. You will note that your bank is the only institutional investor not named among the ten top stockholders. Chase, Citibank, United California, Savings and Trust, Prudential and Equitable Life Assurance Society are all identified. But your account is listed as: "Douglass & Co., Box 2010, Church St. Station."
Enclosure C is Long Island Lighting's "Security Holders and Voting Powers" report to the FPC last year. Here again large holders Chase, Citibank, Manufacturers Hanover and Merrill Lynch, are identified by name. And here again, your account is listed simply as "Douglass & Co., Box 2010, Church St. Station."
The same situation applies to Duke Power Company in North Carolina. Morgan is the only bank among the top ten stockholders which is not identified except by nominee, in this instance "Powers & Co., Box 1479, Church St. Station."
Why is it that utilities from California to Florida and New York, while identifying other institutional investors, do not identify Morgan on their ownership reports?
I note that, in response to our request, Morgan chose not to identify its thirty top security holders, although three other major New York banks did. I note too that Morgan declined to provide the Library of Congress with requested information on interlocks with closely held companies, foreign corporations, and subsidiaries and other affiliates of domestic corporations. Furthermore, regarding interlock information which Morgan did supply the Library, your bank omitted names, indicating only interlocking positions.
The Federal Government and your portfolio companies have enough problems these days without having to play games with an extraordinarily powerful institution whose disclosure practices do not provide adequate and meaningful information regarding ownership and interlocks. I hope that you personally will review our study in the light of these comments, and provide the subcommittee and the public generally with the requested information.
Very truly yours,
LEE METCALF,
Subcommittee on Budgeting, Management and Expenditures.
FLORIDA POWER CORP. – SECURITY HOLDERS AND VOTING POWERS
(For Year Ending Dec. 31, 1972)
1. (A) Give the names and addresses of the 10 security holders of the respondent who, at the date of the latest closing of the stock book or compilation of list of stockholders of the respondent, prior to the end of the year, had the highest voting powers in the respondent, and state the number of votes which each would have had the right to cast on that date if a meeting were then in order. If any such holder held in trust, give in a footnote the known particulars of the trust (whether voting trust, etc.) duration of trust, and principal holders of beneficiary interests in the trust. If the stock book was not closed or list of stockholders not compiled within or list of stockholders not compiled within one year prior to the end of the year, or if since the previous compilation of a list of stockholders, some other class of security has become vested with voting rights, then show such 10 security holders as of the close of the year. Arrange the names of the security holders in the order of voting power, commencing with the highest. Show in column (a) the titles of officers and directors included in such list of 10 security holders.
(B) Give also the voting powers resulting from ownership of securities of the respondent of each officer and director not included in the list of 10 largest security holders.
2. If any security other than stock carries voting rights, explain in a supplemental statement the circumstances whereby such security became vested with voting rights and give other important particulars concerning the voting rights of such security. State whether voting rights are actual or contingent and if contingent describe the contingency.
3. If any class or issue of security has any special privileges in the election of directors, trustees or managers, or in the determination of corporate action by any method, explain briefly. "
4. Furnish particulars concerning any options, warrants, or rights outstanding at the end of the year for others to purchase securities of the respondent or any securities or other assets owned by the respondent, including prices, expiration dates, and other material information relating to exercise of the options, warrants, or rights. Specify the amount of such securities or assets so entitled to be purchased by any officer, director, associated company, or any of the ten largest security holders. This instruction is inapplicable to convertible securities or to any securities substantially all of which are outstanding in the hands of the general public where the options, warrants, or rights were issued on a prorate, basis.
5. Give date of the latest closing of the stock book prior to end of year, and state the purpose of such closing: Stock Book not closed in 1972.
6. State the total number of votes cast at the latest general meeting prior to the end of year for election of directors of the respondent and number of such votes cast by proxy: Total, 9,620,376. By proxy, 9,620,376.
7. Give the date and place of such meeting: March 30, 1972, St. Petersburg, Fla.
SOUTHERN CALIFORNIA EDISON SECURITY HOLDERS AND VOTING POWERS
(For year ending December 31, 1972)
1. (A) Give the names and addresses of the 10 security holders of the respondent who, at the date of the latest closing of the stock book or compilation of list of stockholders of the respondent, prior to the end of the year, had the highest voting powers in the respondent, and state the number of votes which each would have had the right to cast on that date if a meeting were then in order. If any such holder held in trust, have in a footnote the known particulars of the trust (whether voting trust, etc.), duration of trust, and principal holders of beneficiary interests in the trust. If the stock book was not closed or a list of stockholders not compiled within one year prior to the end of the year, or if since the previous compilation of a list of stockholders, some other class of security has become vested with voting rights, then show such 10 security holders as of the close of the year. Arrange the names of the security holders in the order of voting power, commencing with the highest. Show in column (a) the titles of officers and directors included in such list of 10 security holders.
(B) Give also the voting powers resulting from ownership of securities of the respondent of each officer and director not included in the list of 10 largest security holders.
2. If any security other than stock carries voting rights, explain in a supplemental statement the circumstances whereby such security became vested with voting rights and give other important particulars concerning the voting rights of such security. State whether voting rights are actual or contingent and if contingent describe the contingency.
3. If any class or issue of security has any special privileges in the election of directors, trustees or managers, or in the determination of corporate action by any method, explain briefly.
4. Furnish particulars concerning any options, warrants, or rights outstanding at the end of the year for others to purchase securities of the respondent or any securities or other assets owned by the respondent, including prices, expiration dates, and other material information relating to exercise of the options, warrants, or rights. Specify the amount of such securities or assets so entitled to be purchased by any officer, director associated company, or any of the ten largest security holders. This instruction is inapplicable to convertible securities or to any securities substantially all of which are outstanding in the hands of the general public where the options, warrants, or rights were issued on a prorata basis.
5. Give date of the latest closing of the stock book prior to end of year, and state the purpose of such closing: December 5, 1972, on three classes of stock for payment of dividends; on balance of stock for compilation of certain statistical data.
6. State the total number of votes cast at the latest general meeting prior to the end of year for election of directors of the respondent and number of such votes cast by proxy: Total, 58,786,905. By proxy, 58,780.652.
7. Give the date and place of such meeting: April 20, 1972, Edison Building, 2244 Walnut Grove Avenue, Rosemead, California 91770.
LONG ISLAND LIGHTING CO. SECURITY
HOLDERS AND VOTING POWERS
(For Year Ending Dec. 31, 1972)
(A) Give the names and addresses of the 10 security holders of the respondent who, at the date of the latest closing of the stock book or compilation of list of stockholders of the respondent, prior to the end of the year, had the highest voting powers in the respondent, and state the number of votes which each would have had the right to cast on that date if a meeting were then in order. If any such holder held in trust, give in a footnote the known particulars of the trust (whether voting trust, etc.), duration of trust, and principal holders of beneficiary interests in the trust. If the stock book was not closed or a list of stockholders not compiled within one year prior to the end of the year, or if since the previous compilation of a list of stockholders, some other class of security has become vested with voting rights, then show such 10 security holders as of the close of the year. Arrange the names of the security holders in the order of voting power, commencing with the highest. Show in column (a) the titles of officers and directors included in such list of 10 security holders.
(B) Give also the voting powers resulting from ownership of securities of the respondent of each officer and director not included in the list of 10 largest security holders.
2. If any security other than stock carries voting rights, explain in a supplemental statement the circumstances whereby such security became vested with voting rights and give other important particulars concerning the voting rights of such security. State whether voting rights are actual or contingent and if contingent describe the contingency.
3. If any class or issue of security has any special privileges in the election of directors, trustees or managers, or in the determination of corporate action by any method, explain briefly.
4. Furnish particulars concerning any options, warrants, or rights outstanding at the end of the year for others to purchase securities of the respondent or any securities or other assets owned by the respondent, including prices, expiration dates, and other material information relating to exercise of the options, warrants, or rights. Specify the amount of such securities or assets so entitled to be purchased by any other director, associated company, or any of the ten large security holders. This instruction is inapplicable to convertible securities or to any securities substantially all of which are outstanding in the hands of the general public where the options, warrants, or rights were issued on a prorata basis.
5. Give date of the latest closing of the stock book prior to end of year, and state the purpose of such closing: See attached schedule.
6. State the total number of votes cast at the latest general meeting prior to the end of year for election of directors of the respondent and number of such votes cast by proxy: Total, see attached schedule.
7. Give the date and place of such meeting: See attached schedule.
Mr. METCALF. Mr. President, reference is made in the preceding correspondence to two compilations which Mr. Patterson provided me regarding his bank's voting rights to stock in major broadcast companies and air carriers. I complimented him for this disclosure, and suggested that the bank make similar information available regarding Morgan's voting rights to stock in other two compilations provided by Mr. Patterson, dealing with his bank's voting
rights to stock in major broadcast companies and air carriers.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
[Table omitted]