Vanguard Enters into Passivity Agreement as to Bank Holdings
Commentary by Tim Byrne
The FDIC finalized a passivity agreement with The Vanguard Group, Inc., to limit Vanguard's influence over federally insured institutions. The agreement established restrictions and reporting obligations designed to ensure Vanguard remains a passive investor, avoiding actions that could lead to control over these institutions under the Change in Bank Control Act ("CBCA").
This agreement follows the FDIC's observation that Vanguard's holdings in certain institutions were nearing the thresholds that trigger control presumptions under the CBCA. Under the agreement, Vanguard committed to refraining from certain activities, such as influencing management decisions, appointing board members, or soliciting proxies, to avoid exerting control over the covered institutions.
According to the FDIC, the agreement also requires Vanguard to provide detailed disclosures about its holdings, policies and any deviations from its passivity commitments. Vanguard must report annually on its compliance and engage external auditors every three years to assess adherence to the agreement's terms. The FDIC emphasized that this agreement ensures compliance with federal banking regulations while allowing Vanguard to continue its investments without exceeding control thresholds.
In a statement, FDIC Director Jonathan McKernan said that the agreement "should enable the FDIC to address [concerns] about gaps in the FDIC's monitoring of the purported passivity of the largest index fund complexes." He argued that these concerns are somewhat urgent "given the rapid growth of these index fund complexes and the growing body of academic work and other evidence raising doubt about whether these index fund complexes are truly passive." Mr. McKernan cited to concerns that index fund complexes have pushed ESG agendas and present risks to competition due to concentration of ownership. He noted that it will be up to the FDIC to implement a plan to monitor Vanguard's investment stewardship activities.
Commentary
The agreement reflects the assertion of FDIC jurisdiction under the Change in Bank Control Act over large asset management firms that are significant investors in state nonmember banks or companies, including bank holding companies that control state nonmember banks. Investors in such bank holding companies are also subject to Federal Reserve jurisdiction under the same Act and the Bank Holding Company Act.
The Fed generally requires asset management firms to make passivity commitments for investments in bank holding companies that exceed specified thresholds. The passivity commitments required by the FDIC go further than the those of the Fed, both in their substantive requirements and the compliance mechanism to monitor compliance with the commitments. (See Fed's 2019 agreement here.) Among other things, the FDIC's commitments prohibit an asset management firm from having any representative on a bank's board of directors or from filing a shareholder proposal with a bank or holding company covered by the commitments. The asset manager must maintain detailed minutes of meetings with a bank's senior management or board members. The FDIC's commitments also address shareholder stewardship activities, including activities through trade associations, alliances, or other forums.
The FDIC agreement is also notable in requiring external auditors to assess compliance with the commitments. The FDIC is reportedly seeking to require other large asset management firms to enter into similar agreements.
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