Scrutiny of Asset Managers' Stakes in Banks Likely to Increase

Troubles for asset managers like BlackRock BLK, Vanguard and State Street Corporation STT may increase as U.S. bank regulator seeks to increase scrutiny. A top banking regulator is considering a plan to ensure that these asset management giants stick to their passive role when it comes to investing in U.S. banks. The news was first reported by the Wall Street Journal.

Per a regulatory official familiar with the matter, Jonathan McKernan and Rohit Chopra, board members of the Federal Deposit Insurance Corp (“FDIC”), held meetings with BLK and Vanguard to discuss their holdings.

Presently, asset managers operate under “passivity commitments,” meaning that they refrain from certain influential activities in banks wherein they hold large investments in exchange for less burdensome regulatory oversight.

However, in a speech this January, McKernan argued that regulators should increase the scrutiny of asset managers to ensure that the firms are upholding those commitments, as they primarily rely on firms to self-certify.

McKernan is now advocating an order that would direct the FDIC staff to regularly examine large asset managers who have more than a 10% stake in FDIC-regulated banks in order to ensure that these asset managers are not wrongly influencing their operations.

However, the financial industry is currently opposing the effort to add more regulatory oversight.

Lindsey Keljo, a managing director with the Securities Industry and Financial Markets Association, said, “We see no reason to institute duplicative regulations on passive investments in banking organizations without far more justification and proof that these investments are in fact harming banks and their depositors.”

Vanguard stated, “We look forward to continuing our constructive dialogue with the FDIC to answer questions about Vanguard’s proven, long-term investment approach.”

BLK declined to comment, whereas STT did not respond to the requests for comment.

Notably, many a time, asset managers are criticized for exerting undue influence on the management of their portfolio companies. The firms have also been blamed by lawmakers for prioritizing political motives over financial objectives.

As an example, BlackRock was attacked for its use of environmental, social and governance (“ESG”) factors in investing. However, the company denied the allegations, citing the billions that it invested in energy companies.

Currently, BLK and STT carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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