(Bloomberg) -- BlackRock Inc. and Vanguard Group Inc. face another round of scrutiny from the Federal Deposit Insurance Corp., which wants to keep the large asset managers from swaying banks where they have sizable stakes.
In a letter last week to the two companies, FDIC staff sought details about the firms’ investments in banks and asked for proof that they’re operating as passive shareholders rather than activists, according to people with knowledge of the matter. The letter puts the asset managers on notice that any stake held in an FDIC-supervised bank that exceeds the threshold of 10 per cent could trigger tougher responses from the regulator, some of the people said.
The passive label is so important because it lets investors in lenders avoid stringent rules for bank owners. The FDIC is already weighing rule changes that tighten the reins on asset managers, giving it more say over a contentious area historically handled by the Federal Reserve. The new proposal highlights concerns about the firms’ influence in the banking sector, saying it could encourage risky behavior or eventually lead to a concentration of ownership that gives investors too much control over the industry.
FDIC board members have questioned whether asset managers can operate as passive investors with a stake of 10 per cent or more. Some of them have raised concerned about whether managers can be passive when they pursue ESG goals, a hot topic for Republicans in Washington and beyond.
BlackRock and Vanguard together managed about $20 trillion in client assets at the end of June, and their popular index funds are regularly among the top shareholders in banks and in the vast majority of publicly traded companies in the S&P 500.
An FDIC spokesperson confirmed that the letters were issued to two firms and declined further comment.
BlackRock said in a statement that it’s engaging with the FDIC on the matter and, “as a fiduciary, our sole focus is the long-term financial interests of our clients.”
Vanguard is talking to policymakers and has suggested ways to “further clarify and refine expectations around passivity,” a company spokesperson said in an emailed statement. “We continue to advocate for a joint, transparent, and public process that ensures that investors get the regulatory clarity they deserve, and look forward to continuing to engage about our proven, long-term, passive investment approach.”
In its letter, the FDIC told the asset managers that, if a stake in a bank surpasses the 10 per cent mark, they must choose in coming months whether to seek permission to control the lender or agree to stay passive investors, according to some of the people familiar with the matter. If it’s the latter, the regulator would subject the asset manager to increased monitoring rather than rely on the current practice in which the firm promises that it’s acting as a passive investor, they said.
The agency’s letter also asked firms to list positions in banks above 5 per cent, demanded more detailed disclosure around their investment stewardship policies and requested that firms spell out all engagements with FDIC-supervised banks, the people said.
The letter follows a months-long debate among FDIC officials over how the agency could get more influence over asset managers’ investments in banks. Competing plans were discussed by both FDIC Director Jonathan McKernan, a Republican, and Rohit Chopra, a board member who’s also head of the Consumer Financial Protection Bureau.
In July, the regulator unveiled a proposal from Chopra that would give the FDIC more power to review the funds’ holdings in banks. The FDIC also seeks to end asset managers’ reliance on the self-certification process and give its examiners increased ability to analyze interactions between investors and banks.
The Federal Reserve can grant permission for fund managers to exceed a 10 per cent ownership stake if they pledge to be “passive” investors.
The regulator’s approach to assessing control doesn’t need to be reevaluated, said Lindsey Keljo, head of the asset-management group at the Securities Industry and Financial Markets Association, a trade group known as Sifma. “The changes under consideration could have serious unintended consequences, including a detrimental impact on banks’ access to capital,” Keljo said.
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