The Federal Deposit Insurance Corporation (FDIC) issued a proposal July 30 that would increase its oversight of the largest asset managers, such as BlackRock and Vanguard, that hold hefty investments in banks.

The proposal would “launch a broader inquiry into very large asset managers that are accumulating increasingly large stakes in companies across the economy, including banks,” said Rohit Chopra, FDIC board member and director of the Consumer Financial Protection Bureau (CFPB), at the agency meeting.

The banking regulator is concerned to what extent such asset manager firms could influence the banks in which they invest.

Policing the investment advisers

The scrutiny follows debate and negotiation among Republican and Democratic appointees on the FDIC board over how to better police whether the investment companies are living up to promises that they won’t seek to control the banks in which they own significant shares.

Right now, investors that acquire big ownership stakes in banks trigger a slew of banking regulations, but they can avoid those requirements by promising to remain “passive” investors through agreements with regulators.

Under law and through such agreements, third parties that obtain a greater than 10% stake in a bank can be considered a controlling interest in the bank and subjected to stricter regulation and oversight. But firms can avoid those restrictions under “passivity agreements,” in which the investor commits to regulators they will not exert influence on the bank.

Chopra specifically called out BlackRock and Vanguard, which he said “now own large enough shares in many banks to trigger statutory guardrails and limitations.”

Originally proposed in April, Chopra’s initiative would remove an FDIC policy exemption in which the agency defers to the Federal Reserve to review asset managers’ investments in banks. Or, put another way, the exemption in which the FDIC does not review new large investments in banks as long as the Federal Reserve has signed off on that approach will disappear.

“It is highly inappropriate for the FDIC to abdicate the responsibility Congress entrusted to us to safeguard the ownership and control of the banks we supervise,” said Chopra.

He specifically called out BlackRock and Vanguard, which he said “now own large enough shares in many banks to trigger statutory guardrails and limitations,” but avoid them because of those passivity agreements.

The proposal passed in a 3-2 vote, as both FDIC Chairman Martin Gruenberg and Acting Comptroller of the Currency Michael Hsu supported Chopra’s proposal.

Cautious incrementalism from McKernan

Under a proposal advanced in April by FDIC Board of Director Richard McKernan, a Republican member of the FDIC board, the Board would direct staff to assess each year whether certain asset managers that manage large index funds control an FDIC-supervised bank.

“To the extent an asset manager relies on a passivity commitment or other similar regulatory comfort to avoid a control determination, staff would also assess each year whether that asset manager complied with any commitments or other conditions under that comfort. That’s it. It’s that simple. Very basic. All I’m trying to do is get us to monitor compliance with existing law,” he wrote.

Pushback from industry trade groups

The Investment Company Institute issued a statement regarding the proposed rules, saying: “It is alarming to see that the FDIC is proposing to revise the current framework in the absence of a clearly identified problem. The FDIC has decades of experience with fund investments in banks, and they know firsthand that these investments are made for the purpose of seeking higher returns for American investors – the majority of whom are middle-class retirement savers – not to get into the business of running banks.”

When the topic was first raised in April, the Chamber of Commerce submitted a letter to a member of the board of directors, Republican Jonathan McKernan at the FDIC, saying it was essential that the FDIC closely coordinate with the Federal Reserve Board and Office of the Comptroller of the Currency to ensure any
changes to the FDIC’s processes do not create conflicting or duplicative requirements.

And, the Chamber said, “considering the attendant impacts of any rule changes on asset managers and possibly investors, the FDIC should also coordinate with the SEC, as the primary regulator of asset managers.”