Republican staff for the Senate Banking Committee released a report Tuesday taking aim at the nation's largest asset managers and outlined recommendations to curb their "growing influence" at shareholder meetings.
The report focuses on the "big three" managers: BlackRock, which had $8 trillion in assets under management as of Sept. 30; Vanguard Group, which had $7.1 trillion in AUM as of Oct. 31; and State Street Global Advisors, which had $3.3 trillion in AUM as of Sept. 30.
"Each of these firms proudly uses the voting power gained from their investors' money to advance liberal social goals known as ESG (environmental, social, and governance) and DEI (diversity, equity, and inclusion)," the report says. "These once benign-sounding concepts are political movements unmoored from financial performance and, perhaps not coincidentally, also popular with corporate C-suites where managers can claim 'success' on matters irrelevant to investor returns."
The report argues that the three mangers have "enormous influence" over shareholder meetings because when a retail investor buys an index fund, they do not then own the stocks in the fund, the fund owns the stocks. "Even though they buy that voting power with other people's money, that voting power gives asset managers like the big three enormous influence," the report states.
The report goes on to outline seven recommendations to "illuminate this regulatory blind spot and clarify the policy implications of the big three's influence." The recommendations include congressional investigations to "develop a more complete understanding of the extent of the big three's influence over management and corporate policy" of their portfolio companies; urging Congress and the Securities and Exchange Commission to bolster disclosure requirements; and advising lawmakers to pass legislation aimed at curbing money managers' voting influence.
One such bill that was highlighted is the Investor Democracy is Expected Act, or INDEX Act, which was introduced in May by Sen. Dan Sullivan, R-Alaska, and 10 Republican co-sponsors, and debated by the committee in June.
Under the bill, passive fund managers that own more than 1% of a company's shares would be responsible for collecting individual investors' instructions and voting according to the investors' wishes. The bill also stipulates that mangers cannot vote without instructions from fund investors, except for routine matters such as ratification of auditors, which will avoid concerns about shareholder meeting quorums, a summary from Mr. Sullivan's office said.
The report also outlined a "possible implication" of the big three managers' influence: that one or more of them has influenced at least one of the banking organizations in its respective investment funds to "conform its lending activities to ESG principles or otherwise change corporate policies. That influence could rise to a level sufficient for the manager to be deemed to have a "controlling influence" over that banking organization under the Holding Company Act of 1956, which would then mean the manager itself would be a bank holding company, the report said. "Such status would trigger restrictions on a big three firm's commercial activities and significant capital and liquidity requirements that would pose insurmountable problems to its business model," the report added.
In a statement, BlackRock said it "respectfully disagreed" with the report. "The conclusions are built on flawed premises and risk harming millions of everyday investors that rely on mutual funds and exchange traded funds to help them retire with dignity," BlackRock said. "The recommendations would ultimately raise costs for individual investors across the country. The report also fails to consider potential impacts on America's capital markets. The proposals would add unnecessary regulatory costs while inhibiting asset managers' ability to act in clients' best interest."
BlackRock's stance on ESG factors has drawn public criticism from Republicans in Congress and Republican-led states in recent months. But a closer look at its ESG investments, votes and internal practices show that they are not all that revolutionary, Pensions & Investments reported last week.
Separately, Vanguard said in a statement that as the "only investor-owned asset manager," its interests "are squarely aligned with empowering everyday investors to reach their long-term financial goals, leaving management decisions to companies and public policy decisions to policymakers. We look forward to continuing conversations with lawmakers about their concerns and how Vanguard has and will continue to take steps to both facilitate greater transparency and give investors more of a voice in proxy voting."
Last month, Vanguard announced plans to test a pilot program designed to give retail investors more proxy-voting power.
State Street also said in a statement that it disagreed with the report's findings. "The report ignores the critical role of index funds in helping average Americans save for retirement by providing access to low-cost investments," the firm said. "Despite our disagreements, we remain open to discussions with policymakers about how to address their concerns, while at the same time preserving the savings index funds provide to all Americans."
