US regulators seek to limit asset managers’ sway over big banks

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US banking regulators are pursuing a plan that could limit investment managers’ sway over governance and strategy at American banks, in a move the industry called an “alarming” attempt to curb shareholder input.

The Federal Deposit Insurance Corporation approved a proposal on Tuesday that would require large managers of passive investment funds to meet new restrictions before they can buy and hold large stakes in publicly traded banks.

The proposal is emerging amid concern about the power of large investors on both sides of the political aisle. Republicans are worried index funds will align with progressive activists, pushing social or environmental issues. Democrats have worried about large investors bending banks to their own purposes and whether concentrated stakes can lead to antitrust concerns.

“We need a regime for monitoring whether these large asset managers are influencing control that they should not,” Jonathan McKernan, a Republican FDIC board member, said during Tuesday’s meeting.

Large asset managers are often the single-largest shareholders in many of the nation’s biggest banks, holding stakes worth tens of billions of dollars on behalf of their investing clients. When they use their holdings to weigh in on governance and other matters, they can change the outcome of votes on mergers, executive pay plans and board membership, either in favour of management or against.

The proposed rule is subject to a 60-day comment period, after which the FDIC can revise the rule or enact it as is. If ultimately adopted, big investment managers such as Vanguard and BlackRock and backers of popular index funds say it would drive up costs and tie their hands, potentially limiting their ability to invest in banks on behalf of their clients.

Eric Pan, head of the Investment Company Institute, an asset management industry trade group, called the proposed rule “alarming”.

The FDIC knew “these investments are made for the purpose of seeking higher returns for American investors,” Pan said. Another finance industry group, Sifma, said the changes could harm banks’ access to capital.

Regulators have long imposed provisions on bank investors requiring them to obtain approval before acquiring more than 10 per cent of any single bank. Currently, though, large asset managers have waivers that make them effectively exempt from the rule.

Under the proposed rule, large investors would have to pass an FDIC-administered test to prove they are not trying to influence bank management. If they fail the test, the asset managers would be banned from owning more than 10 per cent of any one bank.