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Vanguard has bowed to regulatory pressure and agreed to new monitoring of its investments in other US lenders, a decision that could have a negative impact on money managers and banks.
The deal, announced by the US Federal Deposit Insurance Corp on Friday, will allow Vanguard funds to continue to be major shareholders in the country's banks while also boosting the watchdog. control power over $10tn money manager.
VanguardBlackRock and State Street have accumulated large businesses in US banks as investors have poured into “passive” funds that buy shares in a large number of stocks. Some regulators and politicians have grown concerned that the scale of these houses could allow big fund managers to influence companies that are important to the economy.
FDIC board member Jonathan McKernan, who has called for tougher limits on fund managers' influence at banks, said: “The passivity agreement entered into by Vanguard today should enable the FDIC to address, with respect to Vanguard, the concerns I raised with – January 1st. and many times since about loopholes in the FDIC's supposedly irrelevant inspections of the largest index fund structures.”
Under the agreement announced Friday, when Vanguard owns more than 10 percent of the outstanding shares of the bank holding company under the FDIC, the fund group will enter a so-called passivity agreement with the watchdog. That means Vanguard must prove it will not seek to influence the bank's behavior, for example by pushing it to lend to sustainable energy companies and not oil producers.
The agreement comes a few days before the deadline of December 31 for the watchdog set for Vanguard and BlackRock whether they should sign contracts or face a legal battle over whether they should do so. BlackRock and its corporate groups resisted the new conditions saying they would raise compliance costs unnecessarily and make bank stocks a less desirable investment.
Firms are also asking whether The FDIC you have the power to control how they plant.
Vanguard's agreement with the FDIC will not include investments in large national banks, such as JPMorgan Chase or Bank of America, which are controlled by the Federal Reserve. But it will cover most mid-sized and regional lenders in which Vanguard holds more than 10 percent of their shares.
Index funds are already needed by passive investors, especially banks. But in the past regulators have allowed investment fund managers to self-declare that they will do nothing.
The new default agreements will impose substantive restrictions on Vanguard, and impose a new monitoring system to enforce the agreements overseen by the FDIC. The agreements will specifically prevent Vanguard from influencing banks by appointing directors.
Vanguard will still be able to vote on shareholder resolutions at the annual meeting of shareholders.
It said: “Vanguard is built around passive investment and has long been committed to working constructively with policymakers to ensure that doing nothing means doing nothing. This agreement with the FDIC is another example and recognition of continued commitment. “
The FDIC initially set an October 31 deadline for Vanguard and BlackRock to sign bankruptcy agreements, before pushing it back twice. The watchdog is separately considering new legislation that will require passivity agreements for investments in a wide range of banks.
The FDIC and BlackRock have not said whether the fund manager expects to reach a similar agreement with the regulator before the deadline. BlackRock did not immediately respond to a request for comment after the Vanguard deal was announced.
As a bank, State Street is closely monitored so that bankruptcy laws do not apply.