Vanguard Reaches Deal With FDIC Over Huge Stakes In U.S. Banks

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Vanguard has bowed to regulatory pressure and agreed to new oversight of its investments from some U.S. lenders, a move that could have far-reaching implications for fund managers and banks.

The deal, unveiled Friday by the U.S. Federal Deposit Insurance Corp, will allow Vanguards funds to continue to be major shareholders in a wide range of banks nationwide while also increasing the supervisory power of watchdogs over the $10 trillion fund manager.

Vanguard, BlackRock and State Street have amassed large stakes in U.S. banks as investors have flocked to passive funds that buy shares in large numbers of stocks. Some regulators and politicians are increasingly concerned that the scale of these holdings could allow large passive fund managers to influence companies vital to the economy.

Jonathan McKernan, an FDIC board member who has pushed to further limit the influence of money managers over banks, said: The passivity agreement reached by Vanguard today should allow the FDIC to address, with respect to Vanguard, the concerns I raised on January 1 and several others. since then, gaps in the FDIC's oversight of the alleged passivity of the largest index fund complexes.

Under the agreement announced Friday, Vanguard will file so-called passivity agreements with the FDIC when it owns more than 10 percent of the outstanding shares of more lenders than before. The new agreement includes bank holding companies that own an FDIC-supervised bank in addition to independent FDIC-supervised banks.

Vanguards' deal with the FDIC would not cover investments in the nation's largest banks, such as JPMorgan Chase or Bank of America, which are regulated by the Federal Reserve. But it would cover many regional and mid-sized lenders in which Vanguard owns more than 10 percent of their shares.

The agreements require Vanguard to attest that it will not seek to influence the bank's behavior, for example by pushing it to lend to sustainable energy companies and not oil producers.

The agreement comes just days before the watchdog's Dec. 31 deadline for Vanguard and BlackRock to sign the deals or face a legal battle over whether they are bound to do so. BlackRock and industry groups have resisted the new restrictions, saying they would unnecessarily increase compliance costs and make bank investments less desirable.

Companies also question whether the FDIC has the authority to regulate how they invest. Vanguard has been more conciliatory and has been working with regulators for about a year on the issue.

Index funds must already be passive investors, especially in banks. But in the past, regulators have allowed investment fund managers to self-certify that they would be passive.

The new passivity agreements will for the first time impose a supervisory regime to enforce agreements supervised by the FDIC.

Vanguard will still be able to vote on shareholder resolutions at each annual meeting of the bank's shareholders. But the agreements explicitly prohibit Vanguard from exerting influence over the banks by appointing directors.

He said: Vanguard is built around passive investing and has a long-standing commitment to working constructively with policymakers to ensure passive means passive. This agreement with the FDIC is another example and recognition of this continued commitment.

The FDIC initially set an October 31 deadline for Vanguard and BlackRock to sign the holdover agreements, before extending the deadline twice.

The FDIC and BlackRock did not say whether the fund manager hoped to reach a similar agreement with the regulator before the deadline. BlackRock did not immediately respond to a request for comment after Vanguards' deal was announced.

As a bank, State Street is more closely supervised and therefore passivity rules do not apply.

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