Don’t Bank on it: FDIC Board Withdraws Asset Manager Bank Control Proposals

By: Grant F. Butler and Yuki Sako

Two proposals regarding oversight of the control of banks by asset managers were withdrawn at the 25 April board meeting of the Federal Deposit Insurance Corporation (FDIC). These proposals were a result of increasing concern by bank regulators regarding concentration in control of banks by institutional investors, particularly index funds.

One proposal, submitted by Republican Board member Jonathan McKernan, sought to require the FDIC to monitor compliance by fund complexes with passivity agreements and other regulatory guidance that permits affiliated funds to hold up to 24.9% of the voting securities of banks. Further, the proposal would have required the FIDC to determine annually whether a “covered fund complex” controls, directly or indirectly, an FDIC-supervised depository institution.

The other proposal, submitted by CFPB Director and FDIC Board member Rohit Chopra, would have eliminated an existing filing exemption and required acquirers of voting securities of FDIC-supervised institutions to file a change in control notice with the FDIC in addition to the Federal Reserve Board. The proposal also sought public comment on the implications of concentrated ownership of banks by large asset managers.

The two Republican members of the FDIC Board supported the McKernan proposal, and two Democratic members supported the Chopra proposal. However, the fifth FDIC Board member, Acting Comptroller of the Currency Michael Hsu, indicated he would not support either proposal. Noting that the “distinctions between proxy voting, stewardship, and control can be blurry,” Comptroller Hsu stated that fund control of banks requires further review and should be addressed on an interagency basis.

Although these proposals were tabled, given the bipartisan concerns raised regarding potential influence and control over banks by asset managers it is likely that there will be continued regulatory attention on passivity commitments and the ownership of financial institutions by large asset managers.

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