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Monitoring the Passivity of Index Fund Complexes: Vanguard鈥檚 New Passivity Agreement

Director Jonathan McKernan
 Statement  
December 27, 2024

The passivity agreement entered into by Vanguard today should enable the 多宝游戏下载 to address, with respect to Vanguard, the concerns I raised in January1 and several times since2 about gaps in the 多宝游戏下载鈥檚 monitoring of the purported passivity of the largest index fund complexes.3

Those concerns have some urgency given the rapid growth of these index fund complexes and the growing body of academic work and other evidence raising doubt about whether these index fund complexes are truly passive. Some critics have pointed to evidence that these index fund complexes have pushed ESG agendas at public companies.4 Others have expressed concerns about the risks to competition posed by concentrated ownership.5 Still others have focused more generally on the concentration of power in a few institutional investors.6

The 多宝游戏下载 is required by law to be on the watch for influence of this sort directed at a bank supervised by the 多宝游戏下载. The Change in Bank Control Act generally requires a fund complex or other person to obtain the 多宝游戏下载鈥檚 approval before acquiring control, whether directly or indirectly, of an 多宝游戏下载-supervised bank.7

Today鈥檚 agreement with Vanguard is a good step in the right direction. It adds specificity as to what it means to be a passive investor in 多宝游戏下载-supervised banks or their holding companies. More importantly, it also enhances the 多宝游戏下载鈥檚 ability to monitor and confirm that passivity.

Going forward, it will be up to the 多宝游戏下载 to implement a plan to monitor Vanguard鈥檚 investment stewardship activities. In particular, the 多宝游戏下载 will need to keep a close eye on any informal engagements Vanguard might have with management of 多宝游戏下载-supervised banks. 

To that end, the 多宝游戏下载 should scrutinize Vanguard鈥檚 own compliance program. It will be critically important that the 多宝游戏下载 periodically assess how Vanguard鈥檚 front-line business units, independent risk function, and internal audit function monitor, test, and audit its compliance with its related policies and procedures. I trust and expect that the 多宝游戏下载 will use its information rights under the agreement to review Vanguard鈥檚 relevant internal audit reports and similar documentation.8

I would like to thank the Chairman and the other Board members for their willingness to engage on this topic over the last year. I am especially grateful to the 多宝游戏下载 staff who have worked creatively and diligently to find a path forward.

1Remarks by Jonathan McKernan, Director, 多宝游戏下载 Board of Directors, at the Session on Financial Regulation at the Annual Meeting of the Association of American Law Schools (Jan. 5, 2024).
2Memorandum from Jonathan McKernan, Member, 多宝游戏下载 Board of Directors to the 多宝游戏下载 Board of Directors on Monitoring Covered Fund Complexes鈥 Compliance with Passivity Commitments (July 29, 2024) (and accompanying resolution); Jonathan McKernan, Member, 多宝游戏下载 Board of Directors, Proposal to Enhance Monitoring of Compliance with Passivity Commitments and Other Conditions in 多宝游戏下载-Control Comfort (Apr. 25, 2024); Memorandum from Jonathan McKernan, Member, 多宝游戏下载 Board of Directors to the 多宝游戏下载 Board of Directors on Monitoring Covered Fund Complexes鈥 Compliance with Passivity Commitments and Other Conditions in 多宝游戏下载 Control Comfort (Apr. 15, 2024).
3Although some have conflated the two issues, the question as to how the 多宝游戏下载 monitors the passivity of index fund complexes is distinct from whether the 多宝游戏下载 should amend its existing regulations to require notice to the 多宝游戏下载 under the Change in Bank Control Act when a notice has also been submitted to the Federal Reserve Board. The latter was the objective of a July notice of proposed rulemaking that I opposed. Regulations Implementing the Change in Bank Control Act, 89 Fed. Reg. 67,002 (proposed Aug. 19, 2024); Jonathan McKernan, Member, 多宝游戏下载 Board of Directors, Proposed Amendments to the Change in Bank Control Act Framework (July 30, 2024). Notably, these index fund complexes generally do not submit notices under the Change in Bank Control Act to either the Federal Reserve Board or the 多宝游戏下载, and would not have been affected by the July proposal.
4See, e.g., .
5.
6JOHN COATES, THE PROBLEM OF TWELVE: WHEN A FEW FINANCIAL INSTITUTIONS CONTROL EVERYTHING (2023); .
7See 12 U.S.C. 搂 1817(j)(7); 12 C.F.R. pt. 308, subpt. E.
8My view is that the agreement should have expressly obligated Vanguard to periodically deliver to the 多宝游戏下载 appropriate descriptions of these internal audits, including the audit objectives, work plan, and any findings or recommendations. While I am generally supportive of the approach taken in the agreement, I was not able to support entry into this agreement in the absence of a provision to that effect.

Last Updated: December 27, 2024