EXHIBIT II Senator LEE METCALF, FIRST NATIONAL CITY BANK, Chairman, Subcommittee on Budgeting, Management, and Expenditures, Committee on Government Operations, U.S. Senate Office Building, Washington, D.C. DEAR SENATOR METCALF: Thank you for your letter of January 17 and enclosures. The dilemma you face in developing meaningful information from a system designed years ago to simplify the massive paperwork problem of the securities industry is easily understood. As to our holdings of Carolina Power & Light and, more particularly, the discrepancies between the 1972 annual report of our Investment Management Group and that filed by the Company with the Federal Power Commission, we have prepared and enclose a schedule tabulating the differences. I certainly agree that, in terms of voting control, the current Federal Power Commission form does not provide for a full or meaningful report. We therefore continue to strongly support meaningful public disclosure by institutional investors. In that connection, we will be sure to forward to you copies of our annual report of the 1973 activities of our Investment Management Group when available. This report is currently in preparation and hopefully will be available early in March. Needless to say we would be delighted to have you use this report in furtherance of our mutual objectives. Sincerely yours, Enclosure. WALTER B. WRISTON, Chairman. Carolina Power & Light, common as reported by the company 1 Represents aggregate of customer name registrations % Citibank. BREAKDOWN OF 100 LARGEST COMMON STOCK HOLDINGS OF CITIBANK BY REGULATED INDUSTRY, DEC. 31, 197 (ARRANGED BY MARKET VALUE OF FIDUCIARY HOLDINGS) Public utilities: 3 Senator METCALF. We welcome you, Professor Ratner. Professor Ratner is from Cornell Law School. He was active with this subcommittee in the preparation of "Disclosure of Corporate Ownership." He has an article in that study-Senate Document 93-62. Senator Muskie, who is co-chairman of the committee, is a Cornell man and I understand you are going all the way across the country to teach next fall at Stanford, which is my alma mater. So both Senator Muskie and I, as alumni, welcome you with special qualifications to appear before the committee. I wish at this late hour you would summarize your testimony and give us some comments in accord with what you heard this morning and what was revealed in Mr. Linqua's testimony. STATEMENT OF PROF. DAVID L. RATNER, PROFESSOR OF LAW, CORNELL LAW SCHOOL Mr. RATNER. Thank you. I will be glad to do that. I was asked in my written statement to try to put in context the reasons for requiring disclosure of significant institutional ownership of common stock, the present inadequacies in such disclosure, and the directions in which we ought to go. Obviously, the principal concern here is with the way large public corporations make their decisions. We know that essentially they are run by the managements, that the individual shareholders-singly or in the aggregate-have very little voice and have never had a significant voice. However, we have had a phenomenon, which has been growing in the past 25 years, in which the percentage of the stock of the Nation's largest companies-those listed on the New York Stock Exchange-owned by institutions has increased from less than 13 percent in 1949 to over 30 percent today. That trend is continuing. particularly as more investments are made by pension funds, which have become an increasingly important part of the Nation's savings mechanism. Obviously the decisions to be made by Government policymakers as to whether this is a good or bad trend are complex ones. But the basic requisite for Government policymakers is to have a systematic and comprehensive base of information about the significant holdings, the extent to which ownership in the large corporations is becoming concentrated in the hands of a few institutions. I think that the material which you have accumulated in your report has done a significant service, first, in putting together that information and, second, in disclosing the inadequacy in the present methods for obtaining it. The testimony given by the First National City Bank this morning has shown that institutions can put this information together in a simple, understandable way, and it will put significant pressure on other institutions to follow suit. Requiring disclosure of these holdings does not necessarily rest on an assumption that there is anything wrong with institutions holding large blocks of stock, or that the ownership of a large block creates a controlling interest. The influences working on managements of large companies are subtle and come from many sources. Institutions have the power to vote their stock whether they choose to exercise that power or not. If the percentage of stock of a corporation owned by institutions increases to the point where a few institutions own a majority, or a very substantial proportion, of the shares of stock of a particular corporation, there is no question that the actions of the corporate management-which is interested in maintaining its position of control— will be influenced by that ownership. While the disclosure of stock holdings alone obviously doesn't disclose all of these subtle influences, 40 years of experience with administration of the securities laws by the SEC has indicated that disclosure has two other very important consequences, even where the information disclosed does not indicate any sort of improper activity. The first is that it discourages improper relationships the use of controlling stock interests to secure improper advantages. Many of these institutions are engaged in other lines of activities. Banks are engaged in lending. When they go into bank holding companies, they become affiliated with enterprises in many other lines of business. Obviously there are opportunities for abuse there. Without suggesting that they are utilized in any substantial number of cases, I think it has been demonstrated under the securities laws that the requirement of disclosure makes it less likely that such improper influence will be used. Many things that may be done in the dark won't be done if disclosure has to be made. Secondly, disclosure will increase the level of public confidence in the process. The level of confidence in the American securities markets has been greatly enhanced by the SEC disclosure requirements, even though it can be argued that in many cases the disclosure is meaningless or is not delivered in the right time and manner. The fact that so much information is available enhances people's confidence that they can deal in that market without being hurt by unexpected features. Let me mention briefly the inadequacies in the present system to which the representatives of First National City Bank adverted. The use of nominees has made corporations' shareholders lists useless. This has come about largely for reasons of simplicity in transferring Securities. As your subcommittee discovered, the introduction of the central depository to relieve the paper crisis in the securities industry carries this process one step further; if the depository venture is completely successful, every corporate transfer book will show simply that all of the shares of stock are owned by Cede & Co. Some means has to be found to get behind this nominee ownership and determine who really owns the shares. The important thing is to have the significant information available. in consistent form in a single place. Some institutions have taken the position that they are not going to disclose it. In many more cases, it is simply the fact that it is not conveniently available. Insurance companies report to 50 different State regulators. Mutual funds report to the SEC. Regulated companies report to different agencies under different sets of rules. Banks don't really report to anybody at the moment, at least in regard to their trust department holdings. It is a matter of having one set of rules governing them all, under which the information will be available to the public and to Government policymakers in a form that is immediately usable. I think the efforts of this subcommittee in that direction have been very significant. Thank you. Senator METCALF. Thank you very much, Mr. Ratner. [The prepared statement of Mr. Ratner follows:] PREPARED STATEMENT OF DAVID L. RATNER Mr. Chairman and Members of the Subcommittees. My name is David L. Ratner, I am a Professor of Law at Cornell University, where I specialize in the study of corporations, securities markets and financial institutions. In 1971-72, I served as Chief Counsel to the Securities Subcommittee of the Senate Banking Committee in connection with its study of the securities markets and the securities industry. From 1966 to 1968 I served as Executive Assistant to the Chairman of the Securities and Exchange Commission. In 1970, I published an article on the rule of "one share, one vote" in American business corporations, which your subcommittees published as an Appendix to Senate Document No. 93-62 on Disclosure of Corporate Ownership. I am honored and pleased to have been invited to assist your subcommittees in their present inquiries. The question before you is a momentous one-whether the American people, through their elected representatives and appointed officials, will have adequate information about the ownership and control of the giant corporations which play such a large role in determining the course of our economy and our society. This question is important not only in terms of the people's right to know, but also in terms of the government's ability to frame realistic and effective rules to control and direct economic activity. Business corporations are the dominant institutions in American society. The way in which their decisions are made is therefore of crucial significance to all of us. Yet we know very little about who makes those decisions, or how they are reached. It has been well known for at least four decades that the small individual shareholders, alone or in the aggregate, have no effective voice in corporate, decisionmaking, or even in the so-called "election" process by which the corporate directors are chosen. More recent studies have confirmed that the elected Boards of Directors are not real decision-making bodies, but that the "outside" directors are generally brought in either to rubberstamp the decisions reached by the top management or to provide useful contacts with other entities. If individual shareholders generally have no significant voice in corporate affairs, because of the small size of their individual holdings, why should your subcommittees, or anyone else, be concerned with disclosure of who owns or votes the stock in our major publicly-held corporations? The answer is that there is another, and growing, class of shareholders who do have the power, if not always the desire, to exercise a significant influence on corporate decision-making. I refer to the class of shareholders known collectively as "institutional investors." The most significant trend in the securities markets over the past two decades or so have been.the steady increase in the percentage of stock owned by "institutions". In 1949, according to the New York Stock Exchange Fact Book. 12.7% of the shares of New York Stock Exchange listed companies were held by institutions. By 1962, that figure had increased to 19.9%, and by 1972 had leapt up to 29.6%. Even more striking has been the increasing institutional domination of trading in corporate stock. In 1961, institutions accounted for 33.3% of the public share volume and 38.7% of the public dollar volume on the New York Stock Exchange. In 1971, they accounted for |