Senators and legal experts tussled Tuesday over the merits of a Republican bill that aims to reduce the voting power of the three index-investing giants — BlackRock, Vanguard and State Street.
Republican Sen. Dan Sullivan of Alaska introduced the Investor Democracy is Expected (INDEX) Act last month, and so far a dozen other senators from his party have signed on as co-sponsors of the measure.
The legislation would require investment advisers for passively managed funds with more than 1% of a public company’s voting shares to cast their ballots in accordance with the instructions of fund investors, rather than vote on company issues as the adviser wishes.
“The impetus for this legislation was due to my ongoing frustrations with many of America’s largest banks and insurance companies that undertook policies to start blackballing oil and gas investment development in Alaska,” Sullivan said, as he spoke at a Senate Banking Committee hearing on the voting process for index funds.
“Why were they doing this? Well, I found out these financial institutions do this in part because of pressure from their largest shareholders — the big three investment advisers and their index funds.”
Sullivan and his colleagues were praised last week in a Wall Street Journal op-ed written by an executive from a small asset manager and West Virginia’s Republican state treasurer. That op-ed said the lawmakers have identified a real problem, namely “woke fund managers,” but argued their solution won’t be effective, saying it’s “up to the market to fix it.”
The Senate Banking Committee’s chairman, Democratic Sen. Sherrod Brown of Ohio, also sounded a skeptical note as he presided over Tuesday’s hearing.
“It’s an idea that sounds democratic, but doesn’t consider the cost or complexity or the sheer number of votes involved. For popular, widely held index funds, that could mean reaching out to hundreds of thousands of clients about tens of thousands of corporate votes each year,” Brown said.
A professor of law and economics from Harvard Law School offered a similar warning as he testified at the hearing.
“Let’s make sure that we’re not going to dramatically impede the ability of index funds to do what they’ve been doing. Unfortunately, I believe the bill — while well-intentioned and an intuitive response to the challenges of governance — will, in fact, do harm and achieve relatively little benefit to offset that,” said the Harvard expert, John Coates.
Coates argued that the costs of the bill’s approach “would make index funds less attractive and overall impede the ability of them to keep doing what they’ve been doing.”
But a different expert witness, University of Arkansas School of Law professor Caleb Griffin, maintained that allowing individual investors to set their own voting instructions “preserves the economies of scale of the big three while addressing the root of the problem — that is concentrated voting power in the hands of a small, unaccountable group.”
“They’re expenses that funds have begun to undertake voluntarily,” Griffin also said.
currently offers it to about 40% of its index clients — really institutions. But to say that scaling that up is in no way possible, I think, is a little bit unrealistic, given that they have built it out for institutions and are — in my discussions with them — currently in the process of building it out for retail clients.”
This report was first published on June 14, 2022.