Vanguard Group has entered into a passivity agreement with the Federal Deposit Insurance Corp. that an FDIC director said should allow the regulator to address — with respect to Vanguard — concerns he has raised about gaps in the agency’s monitoring of “the purported passivity of the largest index fund complexes.”
In a Dec. 27 statement, FDIC Director Jonathan McKernan said the concerns he has flagged “have some urgency” considering the “rapid growth” of those index fund complexes and the expanding body of academic work and other evidence that raises doubt regarding “whether these index fund complexes are truly passive.”
“Some critics have pointed to evidence that these index fund complexes have pushed ESG agendas at public companies,” McKernan’s statement said. “Others have expressed concerns about the risks to competition posed by concentrated ownership. Still others have focused more generally on the concentration of power in a few institutional investors.”
By law, the FDIC is required “to be on the watch for influence of this sort directed at a bank supervised by the FDIC,” the director’s statement said.
“The Change in Bank Control Act generally requires a fund complex or other person to obtain the FDIC’s approval before acquiring control, whether directly or indirectly, of an FDIC-supervised bank,” McKernan’s statement added.
The agreement with Vanguard “is a good step in the right direction,” the director’s statement said.
“It adds specificity as to what it means to be a passive investor in FDIC-supervised banks or their holding companies,” McKernan’s statement said. “More importantly, it also enhances the FDIC’s ability to monitor and confirm that passivity.”
In an IVA Quick Take, Jeff DeMaso, editor of The Independent Vanguard Adviser newsletter, said the new agreement defines clearly what it means to be a “passive” investor.
“In short, Vanguard agrees that it won’t shake up company boards, influence business strategy, threaten to dump its shares or get favorable treatment from banks,” DeMaso wrote in the IVA Quick Take. “Importantly, these are all things that Vanguard would say it isn’t doing.”
In the piece, DeMaso, who noted McKernan’s statement, said regulators will argue this is a win for them in that they forced Vanguard to the table and have secured a new agreement. However, the agreement is also a win for Vanguard because it removes some regulatory uncertainty and Vanguard “gets a clear definition of what it means to be passive without giving up much,” DeMaso wrote.
Vanguard also commented regarding the agreement.
“Vanguard is built around passive investing and has long been committed to working constructively with policymakers to ensure that passive means passive,” the firm said in a statement provided via a spokeswoman. “This agreement with the FDIC is another example and recognition of that ongoing commitment.”
Vanguard reported $7.71 trillion in total worldwide index assets managed internally as of June 30, up 19.7% from $6.44 trillion a year earlier, Pensions & Investments’ annual survey of index managers showed.
