Regulators Wrest Rights Away from Vanguard Shareholders

Plus, Democratic lawyers try to block Trump from taking office

The Federal Deposit Insurance Corporation exists by law to keep bank deposits safe. So what in the world is it doing, in the waning days of the Biden administration, negotiating from the Vanguard mutual fund and ETF giant a “passivity agreement” that bars Vanguard from exercising shareholder rights on behalf of Vanguard investors?

The FDIC is there to regulate banks, not mutual funds and ETFs. The theory is that somehow Vanguard, because it is so large, might amass so much bank stock or bank holding company stock that it meets the regulatory definition of “control” of a financial institution.

Rather than adjusting the definition of control or realizing that it’s not an actual problem outside the world of Bernie Sanders’s perfervid fantasies and law-professor seminars, the FDIC has decided to address the issue by stripping Vanguard investors of the rights enjoyed by non-Vanguard investors.

The “passivity agreement” lists ten “prohibited activities.” Vanguard can’t “direct or attempt to direct the management or policies” of a bank. It can’t “have or seek to have any representative serve on the board of directors” of a bank or a bank subsidiary. It can’t “propose a director or slate of directors.” It can’t “solicit or participate in soliciting proxies.” It can’t influence or try to influence policies about dividends, lending, investments, pricing, personnel, “engaging in new business lines or products or services,” “acquiring or selling assets or companies” or “merging with another company.” Vanguard can’t “Dispose or threaten to dispose of securities of a Covered Institution or any of its subsidiaries in any manner as a condition or inducement of specific action or nonaction.” It can’t “file a shareholder proposal.” That’s a lot of things that Vanguard is agreeing to refrain from doing in relation to companies in which it could be the largest shareholder.