Vanguard Securities deals with the FDIC on the major assets of US banks

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Vanguard has bowed to regulatory pressure and agreed to refocus its investments on some US lenders, a decision that could have far-reaching implications for fund managers and banks.

The deal, which the US Federal Deposit Insurance Corp announced on Friday, will allow Vanguard funds to continue to be major shareholders in the nation’s largest banks while increasing the number of custodians. supervisory power more than $10tn revenue manager.

VanguardBlackRock and State Street have amassed large sums of money in US banks as investors pour into “passive” funds that buy more shares of stock. Some regulators and politicians worry that many of these processes could allow big money managers to influence economically important companies.

FDIC board member Jonathan McKernan, who is committed to curbing the strong influence of fund managers over banks, said: “The passivity agreement entered into by Vanguard today should help the FDIC address, with respect to Vanguard, the concerns that I presented on January 1. and several times since the FDIC examination gaps in the absence of the largest index complexes.

Under the agreement announced Friday, when Vanguard owns more than 10 percent of the outstanding shares of the company with the bank regulated by the FDIC, the fund group will enter a so-called agreement of passivity and guards. That means Vanguard must prove it won’t seek to influence the bank’s behavior, for example, by forcing it to lend to sustainable energy companies rather than oil producers.

The deal comes just days before the Dec. 31 deadline set for Vanguard and BlackRock to sign the agreements or face a legal battle over whether they must do so. BlackRock and industry groups have he opposed the new restrictions they say they will raise costs unnecessarily and make bank stocks an undesirable investment.

Firms also ask if they FDIC it has the power to control the way they invest.

Vanguard’s agreement with the FDIC will not cover the investments of the country’s largest banks, such as JPMorgan Chase or Bank of America, which are regulated by the Federal Reserve. But it would provide more medium-sized and regional loans where Vanguard has more than 10 percent of their shares.

Index funds are now required to be passive investors, especially in banks. But in the past regulators have allowed investment fund managers to prove they will do nothing.

The new passivity agreements will impose stricter restrictions on Vanguard, as well as put in place a new monitoring system to enforce the agreements overseen by the FDIC. The agreements will specifically prevent Vanguard from having influence over the banks by appointing directors.

Vanguard will still be able to vote on shareholder resolutions at the bank’s annual meeting.

It said: “Vanguard is built on passive investment and has always been committed to working constructively with policymakers to ensure that passive means passive. This agreement with the FDIC is another example and recognition of that ongoing commitment.

The FDIC originally set an October 31 deadline for Vanguard and BlackRock to sign passivity agreements, before pushing the deadline twice. The watchdog has sidelined a new law that will require passivity agreements for investments in different banks.

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

As a bank, State Street is more careful that passivity rules don’t apply.