CFPB Director Rohit Chopra has issued a statement on developments regarding large asset manager ownership of banks.
Rohit Chopra noted that the US has understood the importance of preventing commercial interests from “gaining an unfair advantage by consolidating ownership of railroads, electric utilities, banks, and other essential infrastructure with other commercial interests under the same corporate conglomerate or trust.”
Chopra added that since banking institutions obtain publicly subsidized funding in the form of federally insured deposits and other government privileges, the United States has a set of laws “that generally prevent banks from steering cheap loans to commercial affiliates.”
He further noted that federal law also blocks bank insiders, including “major shareholders, from getting special rates that are unavailable to others.”
Today, very large investment managers, like BlackRock and Vanguard, own significant stakes in “commercial enterprises across the economy.”
He also mentioned that they own stakes in insured banks.
These firms typically characterize their involvement with their portfolio companies as “passive.”
However, Chopra said we know that chief executive officers and board members of large companies “carefully watch the policy pronouncements of these mega-owners.”
If these firms are not truly “passive,” they may be in “violation of longstanding statutes, including those related to banking,” Chopra noted.
He also mentioned that given their extraordinary ownership of commercial interests, these fund managers should “not be improperly influencing the decisions of FDIC-supervised banks.”
The FDIC has announced two small, but “significant, steps that advance this goal.”
First, the FDIC, in conjunction with the Office of the Comptroller of the Currency and the Federal Reserve Board of Governors, issued an amended advisory opinion that makes clear that these large “passive” asset managers may “not have or seek to have one of their representatives serve as a member of a bank’s board of directors when they have a significant ownership stake in the bank.”
If they do, they “risk violating federal law.” This is a change “from last year’s advisory opinion.”
In addition, Chopra pointed out that the FDIC announced that Vanguard has entered into an agreement with the agency to “ensure that the firm will be passive with respect to its significant ownership stakes in FDIC-supervised banks.”
The agreement provides enhanced tools for the FDIC to “verify that Vanguard is not secretly influencing the policies of banks.”
Chopra continued:
“I agree with my colleague, Director Jonathan McKernan, that if a large asset manager is truly passive as it claims, it should have no problem complying with such an agreement. Without such an agreement, the FDIC would need to use its statutory investigative and enforcement authorities to address potential violations of the Change in Bank Control Act.”
According to the CFPB Director, it is clear that there is “a natural oligopoly of firms that manage assets that track major indices like the S&P 500.”
He concluded that agencies across government charged with “safeguarding critical sectors of the economy from conflicts of interest and anti-competitive conduct will need to take further steps with respect to these large investment managers.”