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BlackRock is launching a broad-based counterattack on a regulatory effort to limit the influence of large fund managers over US banks, saying it will drive up investor costs and “disrupt the flow of capital to the economy”.
The Federal Deposit Insurance Corporation has put forward a proposal that would require investors, including passive investment funds, to seek its approval when they take a stake of 10 per cent or more in a vastly expanded group of banks, including hundreds traditionally overseen by the US Federal Reserve or other regulators.
At the same time, the FDIC has separately contacted BlackRock and Vanguard, the two largest index fund managers, to impose tighter restrictions on their behaviour as big investors in the group of smaller publicly traded banks that it already supervises.
“BlackRock strongly opposes the proposal, which would harm investors, disrupt the flow of capital to the economy, and undermine the efficacy” of the existing regulatory framework, the $11.5tn asset manager wrote in a public comment letter filed on Thursday.
The two-pronged oversight effort has industry executives talking privately about an FDIC “land grab” and warning publicly the new rules will make banks less attractive investments and could destabilise smaller regional lenders.
Politicians on both sides of the political aisle have raised concerns. Republicans worry money managers will push progressive social or environmental causes, while Democrats have raised antitrust concerns about big funds that hold large stakes in multiple competing companies.
The FDIC has set an October 31 deadline for BlackRock and Vanguard to sign new “passivity agreements” that would require them to notify the agency every time they cross the 10 per cent threshold, put new limits on their contacts with bank executives and submit to independent reviews.
BlackRock’s letter said that process was premature. “The FDIC is applying [new restrictions] to certain firms as a fait accompli before reviewing comments on the proposal,” it said, adding the approach lacked transparency and “applies inconsistent standards across firms without a clear rationale”.
Because of its large index funds, BlackRock holds more than 10 per cent of the shares of 39 banks supervised by the FDIC and many more that would be affected by the proposed expansion. The money manager declined to comment beyond its letter.
Vanguard said: “We have engaged with policymakers, and suggested additional reforms that further clarify and refine expectations around passivity. We continue to work constructively with policymakers, including the FDIC.”
The US Chamber of Commerce called the rule proposal “flawed and not supported by data”, while the Conference of State Bank Supervisors said it would lead to “duplicative reviews”.
The Investment Company Institute, a lobby group, warned the proposal was a “drastic and unwarranted departure” that would “impose significant costs and burdens on regulated funds and their investors”.
It also said the renegotiation efforts “introduce uncertainty and create needless barriers for funds seeking to make passive investments in banking organisations”.
The regulator defended its approach. “The FDIC has an interest when entities seek to directly or indirectly control FDIC-supervised institutions,” it said.
The broader proposal’s fate may rest with the presidential election because the winner can shift the balance of power on the FDIC’s board.
But Jonathan McKernan, the Republican FDIC board member who has been vocal about his concerns about index fund power, said the effort to step up scrutiny of Vanguard and BlackRock should continue. “The two issues are distinct, even if perhaps topically related,” he said. “We shouldn’t wait to address an obvious gap in our monitoring framework.”