Senators Debate Proposed Legislation on Index Fund Voting Process

At a Senate Banking Committee hearing, Ranking Member Pat Toomey (R-PA) and Committee Chair Sherrod Brown (D-OH) squared off on the merits of the "Investor Democracy is Expected (INDEX) Act" which would limit the voting power of index fund managers. The Committee also considered testimony regarding (i) how index funds vote on company shares and (ii) whether fund investors should be able to vote on the shares held and managed by the fund adviser.

Senator Toomey urged congress to pass the INDEX Act (see previous coverage). In an opening statement, he argued that the bill would curb the consolidation of corporate voting power, and voting that uses shares purchased with investors' money to push someone's personal agenda or other personal gains that are not in the best interest of the investors. Mr. Toomey cautioned that currently, fund managers have significant influence over company decision-making despite the fact that the managers' voting power was purchased using investor capital. To combat this, he stated that the INDEX Act will require the asset manager of all passive index funds with more than 1 percent of a company's voting shares to either vote in accordance with the fund's investors or abstain from voting entirely.

Senator Brown argued that the proposed legislation does not consider the cost, complexity or sheer number of votes that would be regulated. Mr. Brown asserted that the INDEX Act would leave investors with two potential negative outcomes: (i) not voting, and thus having no say in decisions; and (ii) being inundated with votes on thousands of corporate issues each year. Mr. Brown argued that the legislation does not consider the resources that would be required to reach out to hundreds of thousands of clients on tens of thousands of corporate votes each year, when data shows investors who own shares on their own (i.e., not through an investment fund) only vote approximately 30 percent of the time. Mr. Brown urged Congress to consider alternative reforms that would not diminish the benefits provided by index funds.

The Committee also heard testimony from:

• U.S. Senator Dan Sullivan (R-AK), who stated that by implementing the INDEX Act, investment advisors of passively managed funds would not be allowed to vote unless otherwise instructed by their investors, and that this policy would prevent fund managers from influencing the public market;

• Professor John C. Coates IV, who emphasized the need to strike a balance between economic and practical trade-offs, highlighting that index funds provide huge economic benefits to individual investors and that the push towards concentrated ownership challenges the legitimacy and accountability of delegated governance; and

• Professor Caleb N. Griffin, who highlighted the need to address the issue of "empty voting," stating that it under-incentivizes funds to act in good faith and avoid acting poorly.