Vanguard Agrees New Passivity Agreement with FDIC

The passivity agreement (PDF) entered into by Vanguard should enable the FDIC to address, with respect to Vanguard, the concerns I raised in January¹ and several times since² about gaps in the FDIC’s monitoring of the purported passivity of the largest index fund complexes.³

Those concerns have some urgency 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. Some critics have pointed to evidence that these index fund complexes have pushed ESG agendas at public companies.⁴ Others have expressed concerns about the risks to competition posed by concentrated ownership.⁵ Still others have focused more generally on the concentration of power in a few institutional investors.⁶

The FDIC is required by law to be on the watch for influence of this sort directed at a bank supervised by the FDIC. The Change in Bank Control Act generally requires a fund complex or other person to obtain the FDIC’s approval before acquiring control, whether directly or indirectly, of an FDIC-supervised bank.⁷

The agreement with Vanguard is a good step in the right direction. It adds specificity as to what it means to be a passive investor in FDIC-supervised banks or their holding companies. More importantly, it also enhances the FDIC’s ability to monitor and confirm that passivity.

Going forward, it will be up to the FDIC to implement a plan to monitor Vanguard’s investment stewardship activities. In particular, the FDIC will need to keep a close eye on any informal engagements Vanguard might have with management of FDIC-supervised banks.

To that end, the FDIC should scrutinize Vanguard’s own compliance program. It will be critically important that the FDIC periodically assess how Vanguard’s front-line business units, independent risk function, and internal audit function monitor, test, and audit its compliance with its related policies and procedures. I trust and expect that the FDIC will use its information rights under the agreement to review Vanguard’s relevant internal audit reports and similar documentation.⁸

I would like to thank the Chairman and the other Board members for their willingness to engage on this topic over the last year. I am especially grateful to the FDIC staff who have worked creatively and diligently to find a path forward.

Source: FDIC