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Vanguard has bowed to regulatory pressure and agreed to new oversight of investments in some U.S. lenders, a decision that could have far-reaching implications for asset managers and banks.
The deal, unveiled Friday by the Federal Deposit Insurance Corp., allows Vanguard’s funds to remain major shareholders in a wide range of the nation’s banks while also giving the watchdog its oversight authority over the $10 trillion asset manager. will also be strengthened.
Vanguard, BlackRock and State Street have amassed large stakes in U.S. banks as investors flock to “passive” funds that buy up stakes in huge numbers of stocks. Some regulators and politicians are increasingly concerned that the size of these holdings could allow large passive fund managers to influence companies vital to the economy.
Jonathan McKernan, an FDIC board member who has campaigned for greater control over fund managers’ influence over banks, said, “The passivity agreement Vanguard entered into today will allow the FDIC to address the concerns I raised about Vanguard on January 1st.” “We should be able to deal with it,” he said. And since then, he has mentioned several times the gap in the FDIC’s oversight of the alleged passivity of the largest index fund complexes. ”
Under the agreement announced Friday, Vanguard will now file so-called passivity agreements with the FDIC if it owns 10% or more of the outstanding stock of a broader range of financial institutions. The new partnership includes independent banks supervised by the FDIC, as well as bank holding companies that own banks supervised by the FDIC.
Vanguard’s agreement with the FDIC excludes investments in the nation’s largest banks regulated by the Federal Reserve, such as JPMorgan Chase & Co. and Bank of America. However, the target will be a large number of medium-sized and regional financial institutions in which Vanguard holds a 10% or more stake.
The agreement requires Vanguard to certify that it will not try to influence banks’ actions, such as encouraging loans to sustainable energy companies rather than oil producers.
The agreement was signed just days before a Dec. 31 deadline set by the watchdog for Vanguard and BlackRock to enter a legal battle over whether they will or should sign the agreement. BlackRock and industry groups have resisted the new regulations, saying they would unnecessarily increase compliance costs and make investing in bank stocks less desirable.
Companies also question whether the FDIC has the authority to regulate how they invest. Vanguard has been more conciliatory and has been working with regulators on this issue for about a year.
Index funds are already required to be passive investors, especially in banks. However, regulators have so far allowed investment fund managers to self-certify their reluctance.
The new passivity agreement would for the first time impose an oversight regime to enforce the agreement, overseen by the FDIC.
Vanguard will continue to be able to vote on shareholder resolutions at each bank’s annual general meeting. However, the agreement explicitly prohibits Vanguard from exerting influence over the bank by appointing directors.
“Vanguard is built around passive investing and has long been committed to working constructively with policymakers to ensure that passive means passive. This agreement with the FDIC It’s another example and recognition of that continued commitment.”
The FDIC originally set an Oct. 31 deadline for Vanguard and BlackRock to sign the passive agreement, but has since extended the deadline twice.
The FDIC and BlackRock have not said whether they expect money managers to reach similar agreements with regulators by the deadline. BlackRock did not immediately respond to a request for comment after Vanguard announced the agreement.
Because State Street is more closely supervised as a bank, the passivity rule does not apply to it.