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FDIC ponders tighter checks on big ‘passive’ investors in US banks

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The US Federal Deposit Insurance Corporation is working on proposals aimed at ensuring asset managers do not seek too much influence over the banks in which they hold large stakes.

Republican board member Jonathan McKernan and the Democratic chair Martin Gruenberg are each crafting measures that would demand new requirements of funds that hold more than 10 per cent of a bank’s shares to ensure they remain “passive” investors. One or both could come before the banking regulator’s governing body this month.

The FDIC’s interest has spooked the asset management sector. Industry groups argue tougher regulation could raise compliance costs and lower demand and liquidity for bank stocks if the new rules make it harder for investors to take large stakes.

Currently, whenever BlackRock, Vanguard or other large asset managers cross the 10 per cent threshold, they are required to certify by letter to US banking regulators that they are not seeking to control the bank’s management and operations, although they are permitted to vote on directors and shareholder resolutions.

McKernan told the Financial Times he wants to monitor compliance with those “passivity letters” by asset managers. He is specifically focused on funds that track indices, rather than managers who pick and choose among stocks.

“My aim here is to put an end to self-certification,” McKernan said.

“My plan is to have a vote at the next [FDIC] board meeting, and I have put that on the proposed agenda. I have [had] good discussions with other members of the board . . . from both parties at high level on the issue.”

Gruenberg, one of three Democratic board members, is pushing a broader proposal that would capture a bigger swath of investors, according to three people familiar with the matter. An FDIC spokesperson declined to comment.

The date and agenda of the next FDIC board meeting are expected to be announced shortly.

Republicans have been vocal around the issue of passivity as part of their attacks on what they call “woke capitalism”. They have criticised BlackRock and others for using their influence and votes on shareholder issues to press companies to consider environmental, social and governance matters. 

But there appears to be growing bipartisan support for probing investors’ compliance with passivity agreements. Democrats have raised antitrust concerns around large investors building up stakes in several businesses within the same sector, warning this could harm competition.

Rohit Chopra, a Democratic FDIC board member, told the FT: “When you are exerting control over a bank, that typically triggers long-standing requirements under US banking law. I think there has been some questions about how large asset managers are relying on passivity agreements to sidestep some of these requirements. And I think it’s fair to ask the questions when you have such a significant stake, are you truly passive? How are you communicating with the entities? What expectations do you as a large shareholder have for that entity?”

Chopra and McKernan have met BlackRock and Vanguard to discuss the issue, according to multiple people familiar with the matter.

Any change in policy would particularly affect these two companies because their large index-tracking funds mean they hold positions that are near or above 10 per cent in a substantial number of US banks, although most are not directly supervised by the FDIC. 

BlackRock has 10 per cent or more of the shares in 38 bank holding companies that are supervised by the US Federal Reserve or the Office of the Comptroller of the Currency but which own FDIC-supervised banks; it also has similar-sized stakes in another 70-plus banks in which the FDIC does not have a supervisory role. BlackRock declined to comment.

Vanguard has crossed the 10 per cent threshold in at least one bank that is directly supervised by the FDIC, and it also has stakes of that size in institutions supervised by the OCC and Fed. It said it “leaves management decisions to the underlying companies in [its] index and policy decisions to policymakers”.

The third big index fund provider, State Street, is owned by a bank and regulated differently.

While it is unclear whether the FDIC will press forward with particular proposals, industry groups are already raising objections. 

“We are alarmed by the suggestion that some FDIC directors may be suddenly seeking to overturn the current regulatory approach for vague and not clearly substantiated reasons,” said Eric Pan, president of the Investment Company Institute, a trade association, adding that regulators had recognised for more than 20 years that regulated funds’ stakes in banks “are not made to exercise control over” them.

Progressive groups have also raised concerns that the measures would give additional power to Republicans who accuse asset managers of using their holdings to impose what they see as liberal agendas on banks.

“Investors are specifically allowed to vote on proxies,” said Dennis Kelleher, chief executive of the Better Markets campaign group. “That doesn’t mean they are activist . . . there are legitimate concerns, but you have the rightwing trying to enlist those legitimate concerns to attack anybody who cares about the climate crisis.”

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