the increasing percentage ownership of public corporations by institutional investors has
It's important to know which insiders to watch. The number of US public companies has declined approximately 45% since its peak 20 years ago, despite a rise in the total number of companies. This is because of the growing trend to benchmark funds (and their returns) against those of major market indexes, such as the S&P 500. 
SEC Form 5: Annual Statement of Changes in Beneficial Ownership of Securities is a document that company insiders must file with the Securities and Exchange Commission if they have conducted transactions during the year that they did not previously report via a Form 4. With that in mind, I would like to discuss two specific regulatory issues of particular interest to institutional investors: The Importance of Reliable Information How the JOBS Act Affects Institutional Investors. This effort to shine a light on how investment managers vote recognizes that the institutions managed by such investment managers are using other peoples money. 
18 Id., 501. This form is used to report any changes of ownership of insiders who hold more than 10% of a company's stock. Large transactions also mean more than small trades. Institutional Shareholder Services Inc., 2011-2012 Policy Survey Summary of Results (September 2011), p.13 (Asked, At what level of opposition on a say-on-pay proposal should there be an explicit response from the board regarding improvements to pay practices? 72% of the investors surveyed , and 40% of the issuers surveyed, said that the board should respond to no votes above 30%, or lower thresholds), available at http://www.issgovernance.com/files/PolicySurveyResults2011.pdf. As of June 2016 the figure had increased to 66 percent. The role and influence of institutional investors has grown over time. 
Using firm-level ownership information from the 10 000 largest listed companies, that together make up 90% of the global stock market value, this report provides unique comparative data about who their owners are and how they own. U.S. Securities and Exchange Commission. Thank you for the opportunity to speak with you this evening. Companies file Schedules 13D and 13G to disclose outside beneficial ownership information of more than 5% of a company's stock issue. Investopedia does not include all offers available in the marketplace. An activist investor acquires a significant minority stake in a public company to influence its management. The ownership of corporations has been studied in multiple disciplines and using diverse theoretical frameworks for several decades. Nor did the evidence of that particular study suggest that institutions were able to improve the performance of companies they invest in through active monitoring. Read on for some of the pros and cons that go along with institutional ownership, and whichretail investors should be aware of. This compensation may impact how and where listings appear. These big institutions move in and out of positions in very large blocks so they cannot buy or sell holdings gracefully. WebThe increasing percentage ownership of public corporations byinstitutional investors has Select one: a. had no effect on corporate management. The SEC needs to hear from all credible voices that can add value to the ongoing public dialogue on the issues facing the capital markets today. Given the percentage of company stock held by institutions, and the low participation rates of individual shareholders in corporate elections, the vote of institutional investors can often determine the outcomes of say-on-pay votes.31 As a result, public companies now regularly arrange meetings with institutional investors to lobby these large block holders. See, also, Council of Institutional Investors, Say on Pay: Identifying Investor Concerns (September 2011), available at http://www.cii.org/files/publications/white_papers/09_26_11_say_on_pay_identifying_investor_concerns.pdf. As a result, record ownership has plummeted and in most cases has no meaningful relationship to the number of actual investors. To protect themselves from lawsuits, insiders set up guidelines for buying and selling, leaving the execution to someone else. ", Code of Federal Regulations. Shareholder (Stockholder): Definition, Rights, and Types, Investment Management: More Than Just Buying and Selling Stocks, Institutional Ownership Defined and Explained, Institutional Investor: Who They Are and How They Invest, Security and Exchange Commission's website, Gretchen Morgenson: A Fund Manager Finds the Direct Approach Pays of.
Governments and the public appear supportive of a The growth in the proportion of assets managed by institutional investors has been accompanied by a dramatic growth in the market capitalization of U.S. listed companies. The JOBS Act defines emerging growth company to include businesses with up to $1 billion in annual gross revenue, for up to five years after their IPO.20 This definition would encompass more than three-quarters of all active filers today and it has been estimated that 98% of all IPOs since 1970 would have fit into that category.21. 27 951 Dodd-Frank Act (adding 14A of the Securities Exchange Act of 1934, which generally requires a shareholder vote to approve the compensation of executives disclosed pursuant to SEC regulations). ed., p. 456, table 653. In his book How to Make Money in Stocks,O'Neil has institutional sponsorship as the sixth characteristic to look for in stocks worth buying. To the contrary, they have a wide variety of distinct goals, strategies, and timeframes for their investments. This exemption may result in inconsistent accounting rules, damage financial transparency, and make it difficult for investors to compare the merits of investing in emerging growth companies against other investment options. This form also lists beneficial ownersor people or entities owning more than 5% of a company's stockalong with other pertinent information like board member nominations, as well as executive compensation. Stock owners file Forms 3, 4, and 5 to disclose insider beneficial ownership when they have more than 10% of voting power. 
For example, the proportion of U.S. public equities managed by institutions has risen steadily over the past six decades, from about 7 or 8% of market capitalization in 1950, to about 67 % in 2010. And, of course, institutional investors dont all buy or sell the same asset classes at the same time. Schedule 13D and Schedule 13G are also relevant forms to disclose outside beneficial ownership information. The interesting thing is how they did it: The authors found little evidence that institutions were able to exploit private information to improve investment returns. Over the past few decades, the ownership of public corporations has been turned on its head. While private individuals owned approximately two-thirds of U.S. equities in 1970, today it is institutional investors like Blackrock, Vanguard, and State Street that control two-thirds of such shares. SEC's Updated Insider Trading Rules Take Effect Today: Here's What You Need to Know, Activist Hedge Funds: Follow the Trail to Profit, Why Investors Should Look at the Proxy Statement. ", U.S. Securities and Exchange Commission. The goal should be capital formation, not just capital raising. The study concluded that financial reporting is more reliable when the auditor is involved with the assessment of internal controls.22, In particular, the study observed that auditor testing resulted in disclosure of control deficiencies that were not previously disclosed by management, and that companies that relied solely on management certifying their own internal controls were more likely to restate their financial statements. How to Use Insider and Institutional Stock Ownership. L. 111-203 (2010) (the Dodd-Frank Act). Sure, insiders and institutions tend to be smart, diligent and sophisticated investors, so their ownership is a good criterion for a first screen in your research or a reliable confirmation of your analysis of a stock. You should speak out, and hold the SEC accountable to act on behalf of investors. Failure to comply with those standards makes the financial statement audit less informative, and could potentially reduce the reliability of financial information available to investors. The bottom line is, that as a whole, institutional investors own a larger share of a larger market. Proponents of less disclosure lose sight of the fact that capital raising is not the same as capital formation. Just last year, Congress enacted legislation the so-called Jumpstart Our Business Startups Act, or JOBS Act that actually reduces the amount of information required to be provided by a wide category of public companies. on Trade and Development, Macroeconomic Policies to Promote Growth and Job Creation (New York, March 12-13, 2012), p.3. Again, while the full blame of the declinein the share price can't be placed on this one incident, these events don't help share prices move up because they create bad press and typically force executives to focus on the battle instead of the company. By 2012, however, the domestic market capitalization of the NYSE was more than $14 trillion, an increase of nearly1,500%. After some institutions (e.g.,mutual funds and hedge funds) establish a position in a stock, their next move is to tout the company's merits to the sell side. When viewed in these simple terms, institutional investors are generally considered to be on the buy-side. The experience also underscores the potential impact of shareholder proposals on corporate governance matters. The timing of sales and concurrent declines in correspondingshare prices should leave investors with the understanding that large institutional selling does not help a stock go up. Lynch argues that companies whose stock is owned by institutional investors are fairly valued, if not overvalued. This is the proxy statement in which investors can find a list of directors and officers, along with the number of shares they each own. In that regard, there is good data to suggest that independent attestation of internal controls actually promotes good financial reporting. ", U.S. Securities and Exchange Commission. Insiders tend to buy because they have positive expectations, but they may sell for reasons independent of their expectations for the company. So, there are other rules that define, instead, what an institutional investor is. b. created higher returns for In the 1980s, they held approximately 20 percent to 30 percent of the average firm in the U.S. By 2010, they held over 65 percent. Too often, public company management and other issuers represented by their lawyers, investment bankers, and industry groups dominate the regulatory discussion. "Officers, Directors and 10% Shareholders. For example, Olstein Financial generated a lot of press, particularly in late 2005 and early 2006, for peppering several companies, including Jo-Ann Stores, with a host of suggestions for driving shareholder value, like suggesting thehiring ofa new CEO.. "Schedule 13D. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands. SEC Form 4 documents disclose these hands-off insider transactions, but they don't always state that the sales were scheduled far ahead of time. In important ways, the fund is quite ordinary: a plain vanilla E.T.F. 19 Pub. This process of evaluation is quite fraught, asa portfolio manager whohas experienced a bad quarter might feel pressured todump underperforming positions (and buy into companies that have trading momentum) in the hope of achieving parity with the major indexes in the following quarter. True capital formation requires that the capital raised be invested in productive assets like a factory, store, or new technology or otherwise used to make a business more productive. "Schedules 13D and 13G.". Although the battle was eventually settled, the common stock lost some 12% of its value during the three months of back and forth between the parties. If investors improve performance by focusing on a companys publicly available information, then preserving access to such information is critically important, for both investor protection and capital formation. 18, 2013). The JOBS Act defines emerging growth company to include businesses with up to $1 billion in annual gross revenue, for up to five years after their IPO. Part of the reporting includes the shareholder's relationship to the company. 
Once an institutional investorestablishes a large position, its next motive is typically to find ways to drive up its value. Thomas J. Chemmanur, Gang Hu and Jiekun Huang, The Role of Institutional Investors in Initial Public Offerings, The Review of Financial Studies, Vol 23, No. "Insider Transactions and Forms 3, 4, and 5." For example, last year, the SECs Office of Chief Accountant completed a study and recommendations on the attestation requirement for certain mid-cap issuers. The Georgetown Law Journal, 2007.
6 (Dec. 2008), available at http://www.kellogg.northwestern.edu/faculty/sapienza/htm/trusting_stock.pdf. At the same time, the number of IPOs has plummeted. Certainly not, but it does greatly enhance the probability that they will book a profit. Given the importance that Congress has placed on say-on-pay, this delay is unacceptable. In the mid-1960s, physical persons held as much as 84% of all publicly listed stocks in the United States. The benefits of auditor attestation are also confirmed by other commenters, including the Council of Institutional Investors, the Center for Audit Quality, and the AICPA. Forms are filed at different stages of stock acquisition. But Cf. That's because it takes a great deal of time and money to research a company and to build a position in it. The New York Times. Maxine Waters, Ranking Member, Subcommittee on Capital Markets and Government Sponsored Enterprises, U.S. House of Representatives (October 4, 2011), available at http://www.aicpa.org/Advocacy/Issues/DownloadableDocuments/404b/10_4_11-404SubcommitteeLetter.pdf. The big lesson here is that institutional selling can send a stock into a downdraft regardless of the underlying fundamentals of the company. For example, under the JOBS Act, an emerging growth company only has to provide two years (rather than the typical three years) of audited financial statements, and the company can omit the selected financial data otherwise required for any earlier period. Given the number of studies indicating the positive impact to capital formation when investors have access to useful and reliable information, it is troubling that disclosures are being scaled-back. Note: The term private information is used in economic theory to describe the relative position of participants in markets reflecting information asymmetry. I look forward to reviewing the results of research in this area, after economists have had an opportunity to study the effects of such provisions. Institutional ownership refers to stock that is held by investment firms, funds, and other large entities rather than individual, retail investors. SEC Form 13F is a quarterly report filed by institutional investment managers that discloses their U.S. equity holdings, revealing their top stock picks. O'Neil and Lynch both agree that institutional ownership can be dangerous. 12 William O. Douglas and George E. Bates, The Federal Securities Act of 1933, Yale Law Journal, Vol. To achieve that goal, the legislation tries to reduce the cost of going public for these companies. 24 U.N. Conf. It alsoputs them into a potentially moreadvantageouspositionthan that of most individual investors. This goal is so fundamental to our understanding of securities regulation that the benefits of transparency might almost be taken for granted. Companies file Schedules 13D and 13G to disclose outside beneficial ownership information of more than 5% of a company's stock issue. 
6LinkedIn 8 Email Updates, http://finance.wharton.upenn.edu/~keim/research/, http://icifactbook.org/fb_ch1.html#americans, http://www.world-exchanges.org/statistics/monthly-reports, http://www.nasdaqomx.com/aboutus/timeline/, http://www.nyse.com/attachment/VOL90-99.prn, http://www.nyse.com/press/1360320784446.html, http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=5aaabb66-36eb-4b1e-8195-3cbeda832814, http://www.sec.gov/news/studies/2011/404bfloat-study.pdf, http://www.aicpa.org/Advocacy/Issues/DownloadableDocuments/, http://www.aicpa.org/Advocacy/Issues/DownloadableDocuments/404b/10_4_11-404SubcommitteeLetter.pdf, http://www.un.org/esa/ffd/ecosoc/springmeetings/2012/Unctad_BGNote.pdf, http://www.kellogg.northwestern.edu/faculty/sapienza/htm/trusting_stock.pdf, http://sec.gov/comments/s7-31-10/s73110-54.pdf, http://www.rrdonnelley.com/_documents/industry-solutions/financial_services/5_corporate_governance_sec_ht_irv2011.pdf, http://www.issgovernance.com/files/PolicySurveyResults2011.pdf, http://www.cii.org/files/publications/white_papers/, http://blogs.law.harvard.edu/corpgov/2013/03/21/2013-proxy-season-preview-key-shareholder-proposals/, http://georgiainfo.galileo.usg.edu/FDRspeeches/FDRspeech45-1.htm, First, the importance of reliable information to investors, and some troubling efforts to scale back disclosures and reduce transparency; and. This form is filed quarterly by institutional investment managers who have a minimum of $100 million in assets under management (AUM) within 45 days of the end of a quarter. Institutional turnover in most stocks is quite low. See, Exchange Act 14A(d), which was added by 951 of the Dodd-Frank Act. The shift has come as more American families participate in the capital markets through pooled-investment vehicles, such as mutual funds and exchange traded funds (ETFs).