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.

The FDIC could use the remaining days of the Biden administration to try to wrest similar “passivity agreements” out of other large institutional investors such as Fidelity, BlackRock, or State Street. FDIC director Jonathan McKernan signaled that in a social media post saying, “The FDIC will now confirm the actual passivity of one (for now) of the Big Three index funds. This is a big change in policy that I've been pushing since January.”

One hopes the other money managers put up a tougher fight than Vanguard did before surrendering the rights of their shareholders. For all the concern about concentrated ownership and conflicts of interest or pushing ESG “wokeness,” behind all the ETFs and mutual funds are actual shareholder-owners. When their rights and those of their representatives are stripped away, all that is left are managers subject to agency problems and federal regulators with agendas that don’t always match up with those of the shareholders. Whatever problems afflict the U.S. banking sector, a surplus of shareholder activism sure isn’t among them.

Democratic lawyers try to block Trump: After a Republican lawyer, John Eastman, a former clerk to Justice Thomas, worked on a legal strategy to get Congress to name Trump the winner in the 2020 election, Democrats moved to have him disbarred, the FBI seized and searched his his cellphone, and prosecutors in Arizona charged him with a crime (which he denies).

Now one of Eliot Spitzer’s rivals in the 1998 Democratic primary for attorney general of New York State, Evan Davis, and President Obama’s former Martha’s Vineyard summer host, David Schulte, are out with an opinion piece in The Hill arguing “Congress has the power to block Trump from taking office, but lawmakers must act now.” Davis and Schulte, former clerks to Justice Potter Stewart, assert that under the 14th Amendment, “an oath-breaking insurrectionist is ineligible to be president.”

“Democrats need to take a stand against Electoral College votes for a person disqualified by the Constitution from holding office,” Davis and Schulte write.

Davis, among his many genuine distinctions, staffed the House impeachment committee against President Nixon, who, in his farewell speech, said, “always remember, others may hate you, but those who hate you don't win unless you hate them, and then you destroy yourself.”

Perhaps this is an excessively harsh take on it, but pressing the idea that Congress should block a duly elected president from taking office seems like a case of the Democrats destroying themselves by becoming like Trump, the person they hate.

Certainly the voters had ample opportunity to consider the 14th Amendment argument in the course of a campaign in which Trump was repeatedly depicted as a threat to democracy. What could be less democratic than asking Congress to overturn the result of an election?

Will Davis and Schulte get ostracized and subjected to lawfare the way John Eastman did for representing his client? Imagine the uproar that would ensue if, after Trump does take office, an FBI Director Kash Patel tries to seize and search the cellphones belonging to Davis and Schulte. Maybe, if it does come to that, Davis and Schulte can hire John Eastman to defend them and make a principled case for the right to float cutting-edge legal arguments about election law without it amounting to a crime.