Vanguard, BlackRock, State Street Face Potential Hurdle From Decades-Old Rules

Company stake limits may be the next frontier in the battle over “woke capitalism.” 

Vanguard is sounding the alarm that regulators may soon enforce 90-year-old laws that set limits on how much of a company financial institutions and utilities can actually own. The rules — some of which got their start alongside the newly formed electricity industry in the 1930s — are being pushed by conservative lawmakers. 

They’re worried that the big three asset managers — Vanguard, BlackRock, and State Street — are controlling too much proxy voting power, and are pushing progressive agendas like ESG and diversity. Those companies collectively own nearly 25% of many US companies, according to an Financial Times analysis. Whoa.

Speak to a Manager

The rules restrict companies from owning an excess of 10% ownership stakes, but those rules have gone largely unenforced as long as the investor doesn’t seek management roles. That (let’s call it professional courtesy) may be coming to an end, and could force asset managers to take on more risk to track the indexes of their funds. 

Vanguard updated its disclosures in July, highlighting the potential impact. When a fund is subject to an ownership limitation, it usually seeks permission to exceed it, although there’s no guarantee. The company may now be required to sell those securities, or even agree to vote proxies in a certain way, according to the filings.

“Vanguard believes in clear and transparent disclosures,” a company spokesperson told The Daily Upside, adding that the regulation could have “negative consequences” on fund expenses, performance, and taxes. If enforced, the bill could end up forcing managers to get creative to continue to track their indexes, like by using more sophisticated — and expensive — derivatives strategies. 

“We continue to work with policymakers to answer questions, address concerns and minimize these risks,” the spokesperson said.

Don’t You ESG Me: BlackRock, the world’s biggest asset manager, has been the prime target of the anti-ESG pushback. The company lost around $4 billion in assets under management as a result of a political backlash against environmental, social, and governance investing in the US alone, CEO Larry Fink said last year.

• In March, Texas became one of the latest states to pull pension funds from the asset manager, citing concerns that the company will boycott the fossil fuel industry, like oil and gas producers, which make up a significant portion of the state’s economy.
• Florida, Louisiana, and Missouri have all said they plan to pull money over BlackRock’s ESG efforts. Can’t we just agree to disagree?