FDIC Considers Proposals on Ownership and Bank Control
Commentary by Tim Byrne
Two resolutions before the FDIC Board of Directors concerning proposed changes to Bank Control Act oversight regulations were withdrawn after failing to gain majority support.
The first proposal, sponsored by FDIC Director Jonathan McKernan, would have required the FDIC to (i) monitor compliance with any "passivity commitment" of a "covered fund complex" that permits affiliated funds to hold up to 24.9% of the voting securities of a bank; and (ii) annually assess whether asset managers that manage large index funds "control" an FDIC-supervised bank. (See Memorandum and Resolution). Mr. McKernan expressed concerns that the “big three” asset managers (Vanguard, BlackRock and State Street) were using their voting interest through index investment funds to influence social policy. He argued "[if these fund complexes are using] their purportedly passive index funds to push social policy [or] to influence bank policy, then there’s a real and significant problem here, and [there’s] one... the FDIC needs to get [ahead of] before the influence of these fund complexes grows even larger." (See also related coverage)
The second proposal, sponsored by CFPB Director and FDIC Board member Rohit Chopra, would have (i) eliminated a filing exemption on FDIC review of an application for a "change in control" of a bank holding company if the FDIC reviewed it; and (ii) requested comment on asset managers and their concentrated ownership of banks. (See Resolution and Notice of Proposed Rulemaking.) FDIC Chair Martin Gruenberg supported the proposal, stating: "I am not aware of another provision [where, by rule,] the FDIC defers to another agency on a matter affecting an FDIC-supervised institution."
The Board was split along party lines, Republican members supported the first proposal, and Democratic members supported the second proposal. Acting Comptroller of the Currency and board member Michael Hsu said he would vote against both proposals. Mr. Hsu argued that issues of bank ownership and control are shared across the FDIC, Fed and OCC, and therefore require interagency coordination. Mr. Hsu stated that agencies "should work together to strengthen bank control assessments, instead of creating more process[es] and opportunities for turf battles or fragmentation."
As a result, Mr. McKernan and Mr. Chopra withdrew their separate resolutions, but indicated that they would bring the proposals back at a later date following further review.
Commentary
The McKernan proposal is relevant to large asset management firms. The Chopra proposal to eliminate the filing exemption would impact a much larger number of investors in banks, although it would not eliminate the exemption for transactions that are subject to Federal Reserve review under the Bank Holding Company Act, which is a statutory exemption. Both proposals raise issues likely to attract the continued attention of the regulators. The rule proposal, for example, would have included 19 control-related questions for public comment. The regulators could pursue several of the issues addressed in the proposals both in a supervisory context as well as in future formal rulemakings or other regulatory actions.
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Senate Banking Committee Republicans expressed concern as to the rising influence of the "Big Three" asset managers - BlackRock, State Street and Vanguard - on corporate America through the voting power resulting from their ownership of index funds.
