Senate committee debates bill to curb money managers' voting influence

Senate Banking Committee members on Tuesday debated and heard differing expert testimony on a bill that would require large passive fund managers to vote proxies in accordance with individual investors' instructions instead of at the managers' discretion.

Sen. Dan Sullivan, R-Alaska, and 10 Republican co-sponsors on May 18 introduced the Investor Democracy is Expected Act, or INDEX Act, in an effort to reduce money managers' influence over public companies.

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. Most notable matters, such as changes of control, director elections and shareholder proposals, are not routine, the summary added.

In testimony before the committee Tuesday, Mr. Sullivan took aim at the "big three" money managers — BlackRock, which had $9.6 trillion in assets under management; Vanguard Group, which had $8.1 trillion in AUM; and State Street Global Advisors, which had $4 trillion in AUM, all as of March 31.

"At its core, the INDEX Act is politically and policy neutral, focused instead on the very real and unprecedented power amassed by the big three investment advisers that should be a concern of us all," Mr. Sullivan said.

Chairman Sherrod Brown, D-Ohio, does not support the bill and said it would introduce additional cost and complexity for managers and investors. "It's hard to imagine that someone who specifically picked a professional to invest their money for them would want to become an expert in corporate proxy voting and be forced to keep track of hundreds of corporate meetings," Mr. Brown said.

The bill, Mr. Brown added, would "leave Americans whose money is invested in these index funds with two bad outcomes — either to have no voice, because the bill protects fund managers when they don't want to ask for directions on voting, or to be inundated with votes on thousands of corporate issues."

Two professors also testified before the committee Tuesday. John Coates, Harvard University professor of law and economics, former acting director of the Securities and Exchange Commission's division of corporation finance and the agency's general counsel, broadly opposed the bill; while Caleb N. Griffin, assistant law professor at the University of Arkansas, broadly supported it.

"Involving investors in the voting process will not only reduce the concentrated power in the hands of the index fund managers, but it will also give voice to an underrepresented group of investors," Mr. Griffin said in his written testimony.

Mr. Coates in his testimony said the bill is not practical or cost-effective: "The bill, while well intentioned and an intuitive response to the challenges of governance, will, in fact, do harm and achieve relatively little benefit to offset that."

During a line of questioning from Sen. Chris Van Hollen, D-Md., Mr. Coates said the bill would lead to less voting by long-term investors. Mr. Van Hollen in response asked, "That means more relative voting by hedge funds and other short-term investors?"

Yes, Mr. Coates said, "This bill would boost the power of Carl Icahn or Bill Ackman or pick your other favorite hedge fund activist to come in and vote."

Sen. Pat Toomey, R-Pa., the committee's ranking member, supports the bill and said in his opening statement that BlackRock, State Street and Vanguard are the largest voting blocs in nearly 90% of S&P 500 companies. "Even though this isn't the managers' money, and they are supposed to be investing this money passively, they're nonetheless voting these shares," Mr. Toomey said.

Representatives from BlackRock, State Street and Vanguard did not respond to requests for comment.

On Monday, BlackRock announced it was expanding its Voting Choice program to allow more clients invested in its equity index funds to cast proxy votes.