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Vanguard bowed to regulatory pressure and agreed to new oversight of investments by some US lenders, a decision that could have wide implications for money managers and banks.
The deal, announced Friday by the U.S. Federal Deposit Insurance Corp., will allow Vanguard’s funds to continue as large shareholders in the nation’s broadest banks and increase oversight. Supervisory power $10tn money manager.
VanguardBlackRock and State Street have amassed large stakes in US banks as investors have poured into “passive” funds that buy large numbers of shares of stock. Some regulators and politicians have become concerned that the scale of these holdings could allow large passive fund managers to influence companies important to the economy.
FDIC board member Jonathan McKernan, who has lobbied for tighter controls on fund managers’ influence over banks, said: “The passivity agreement entered into by Vanguard today will address the concerns I raised with Vanguard to the FDIC on January 1. And several times the FDIC’s largest index fund complexes have had near-gaps in monitoring alleged inactivity.”
Under the deal announced Friday, when Vanguard owns more than 10 percent of the outstanding shares of a company owned by an FDIC-supervised bank, the fund group will file a so-called passivity agreement with the watchdog. This means Vanguard must demonstrate that it will not seek to influence the bank’s behavior, for example by pushing it to lend to sustainable energy companies and not oil producers.
The deal comes just days before a December 31 deadline for Vanguard and Watchdog Blackrock to sign contracts or face legal battles over whether they are required to do so. There are BlackRock and industrial groups New restrictions resisted Says they will unnecessarily raise compliance costs and make bank stocks less-than-desirable investments.
Organizations also question whether FDIC They have the power to control the way they invest.
Vanguard’s agreement with the FDIC does not cover investments in the nation’s largest banks, such as JPMorgan Chase or Bank of America, which are regulated by the Federal Reserve. But it will cover many mid-sized and regional lenders where Vanguard holds more than 10 percent of their shares.
Index funds must already be passive investors, especially in banks But regulators in the past have allowed investment fund managers to self-certify that they will be inactive.
The new passivity agreements will impose concrete restrictions on Vanguard, as well as a new monitoring system to enforce the agreements overseen by the FDIC. The agreements will prevent Vanguard from exerting influence over the bank by specifically appointing directors.
Vanguard will still be able to vote on shareholder resolutions at the bank’s annual shareholder meeting.
It says: “Vanguard has long been committed to working constructively with policymakers to ensure passive investing is built around passive investing and to ensure passive means passive. This agreement with the FDIC is another example and recognition of that ongoing commitment.”
The FDIC originally imposed an Oct. 31 deadline for Vanguard and BlackRock to sign passivity agreements, before pushing back the deadline twice. The watchdog is separately considering a new rule that would require passivity agreements for a wider range of investments by banks.
The FDIC and BlackRock have not said whether the money manager expects to reach a similar agreement with the regulator before the deadline. BlackRock did not immediately respond to a request for comment after Vanguard announced the deal.
As a bank, State Street is more closely supervised so passivity rules do not apply
