The big three fund managers that jointly manage more than $23 trillion in assets are coming under the scrutiny of federal regulators over their large holdings in many U.S. banks.
BlackRock Inc (NYSE:BLK), State Street Corp (NYSE:STT) and Vanguard run funds that passively track the performances of equity indexes such as the S&P 500. To achieve this, they attempt to match the weightings of stocks held in these funds, to the index weightings.
But in doing so, BlackRock and Vanguard have each built holdings of more than 10% of the shares at several banks, and this is worrying the Federal Deposit Insurance Corp (FDIC), one of the government institutions responsible for banking supervision.
At present, 10% ownership of shares is considered a threshold at which point an investor is considered to have a controlling interest in a bank. Investors must then seek regulatory permission to acquire shares beyond this threshold.
But fund managers are largely exempt from this requirement given their passive investment roles, although they can still use their share ownership to vote in shareholder meetings.
Some board members of the FDIC, are becoming concerned that the big fund managers could overlook their commitment to passive investment and exert greater influence over banks, given the size of their stakes.
Board member Jonathan McKernantold the Wall Street Journal of his concerns and is seeking a curb on BlackRock and Vanguard from acquiring further shares above the 10% threshold while the FDIC investigates.
“We need to be doing more to actually confirm that the Big Three are not leveraging their large stakes to exert influence over FDIC-regulated banks,” he told the WSJ.
BlackRock owns the iShares series of exchange-traded funds. Its flagship ETF that follows the S&P 500 is the iShares Core S&P 500 ETF (NYSE:IVV). Vanguard, meanwhile, manages the Vanguard S&P 500 ETF (NYSE:VOO), while State Street runs the SPDR series and the SPDR S&P 500 ETF Trust (NYSE:SPY) is its big index tracker.
‘Problem Of Twelve’
It’s not only regulators who have concerns over the influence of the big funds. In his 2023 book “The Problem of Twelve,” Harvard law professor John Coates asserts that roughly 12 people will have effectively seized power over the majority of U.S. public companies in the future.
He issued similar warnings about “a small number of institutions [that] acquire the means to exert outsized influence over the politics and economy of a nation.”
He says in the book: “The Big Four index funds of Vanguard, State Street, Fidelity, and BlackRock control more than 20% of the votes of S&P 500 companies — a concentration of power that’s unprecedented in America.”
In its iShares US Financials ETF (NYSE:IYF) BlackRock’s biggest banking holdings are in JPMorgan Chase & Co (NYSE:JPM), Bank of America Corp (NYSE:BAC) and Wells Fargo & Company (NYSE:WFC). The Vanguard Financials ETF (NYSE:VFH) holds the same three stocks but with differing weightings.
Benzinga reached out to the FDIC for further details, but the agency said it was not commenting.
