The Danger of Ownership Consolidation

By pressmaster @ Adobe Stock

What happens when a small number of asset managers use their investors’ money to control America’s corporate world and, more specifically, its banks? It might not be what’s best for shareholders. Instead, it may be what’s best for fund managers and their friends in Washington, D.C. When it comes to banks, there are special rules that require asset management companies to operate as passive owners rather than become actively involved. Now, the FDIC is worried that the asset management oligopoly of BlackRock, Vanguard, and State Street might be getting too involved in the business of the banks they own. Andrew Ackerman writes in The Wall Street Journal:

Banking regulators are scrutinizing whether index-fund giants BlackRock, Vanguard and State Street are sticking to passive roles when it comes to their investments in U.S. banks.

The three firms manage more than $23 trillion in total, with much of it in funds that passively mimic indexes such as the S&P 500.

BlackRock and Vanguard each hold more than 10% of the shares at many banks, a threshold that normally determines whether an investor is assumed to have a controlling interest in a lender, while State Street also holds a number of sizable stakes. Regulators have an interest in policing who owns and controls banks because of their special role in the economy.

At present, regulators in effect exempt the biggest asset managers from a host of onerous banking rules—such as needing permission when they acquire shares above the 10% threshold—as long as the firms remain passive. That means they shouldn’t exert influence on management or boards, including by imposing political views, though they can vote in shareholder elections.

The existing approach could soon change, spurred by members of the Federal Deposit Insurance Corp. One board member, Jonathan McKernan, told The Wall Street Journal he has developed a plan to enhance the FDIC’s monitoring of the firms and hopes it will receive a vote from the board over the coming weeks. He is pressing for an order to pause the firms’ investments in FDIC-regulated banks above the 10% threshold while the agency examines the matter.

In a sign the issue has bipartisan support among the five-member FDIC board, both McKernan, a Republican, and Rohit Chopra, a Democrat, have jointly held recent meetings with officials from Vanguard and BlackRock to discuss their holdings, according to people familiar with the discussions. McKernan has also discussed the matter at a high level with other board members.

“We need to be doing more to actually confirm that the Big Three are not leveraging their large stakes to exert influence over FDIC-regulated banks,” he said.

Any shift to oversee asset-managers’ stakes more tightly would reflect broader concerns in Washington about the power and influence of the index-fund-managers over corporate America and their ability to cast pivotal votes that determine everything from who sits on a company board to climate change to pay equity.

Action Line: The consolidation of control of America’s corporate sector into the hands of a few executives at the largest money managers is something to worry about. Investors should question whether or not they want BlackRock, Vanguard, or State Street controlling the power of their shares. Instead, consider owning individual securities in a portfolio held so you have the voting power. When you want to talk about building a portfolio like that, I’m here.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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