With the inauguration looming and the upheaval of the regulatory agenda set to unfurl, a small drama of sorts is unfolding in asset management.
Late last year Vanguard Group entered into an agreement with the Federal Deposit Insurance Corporation as the regulator sought more oversight of passive bank ownership by asset managers.
The move came after the regulator requested information from BlackRock, State Street Global Advisors, and Vanguard in August. (In July, the FDIC board approved proposals to amend changes to the Bank Control Act regulations.) In the wake of the collapse of Silicon Valley Bank, the FDIC wanted asset managers with stakes in banks over 10 percent to sign a passivity agreement, stating they would not attempt to influence decision-making at the banks — something that is already done by the Federal Reserve.
The deadline to provide the information was January 10.
On January 9, however, BlackRock requested an extension to March 31. On Monday, the FDIC moved the deadline to February 10. In the letter asking for an extension, seen by II, BlackRock said the firm had reached out to the FDIC to discuss terms following the initial request in August, but the regulator only responded following the conclusion of discussions with Vanguard — and that BlackRock had only received a preliminary agreement on January 2.
BlackRock has made it clear it has no intention of simply ignoring the request but the manager questioned why it was given less than two weeks to review the proposal when Vanguard had several months. The firm said its own ability to negotiate should not be impacted by the the regulator prioritizing discussions with Vanguard.
However, sources say the manager may be dragging its feet, hoping the new administration will pressure the FDIC to drop the rule. The new deadline in February is, of course, three weeks after January 20.
“It is likely to die, likely to go away,” said Kevin Stein, managing director at Klaros Capital and formerly an associate director at the FDIC, who considers the proposals to be unnecessary in the first place. “If it was a Harris administration it would probably get revisited, and BlackRock would comply as needed. But given the fact that there's a change in administration they’ve just started kicking the can down the road.” BlackRock declined to comment.
Changes at the FDIC Are Already Underway
Incumbent director Martin Gruenberg has already announced intentions to resign on January 19, after initially saying he would stay on until a successor was approved by the Senate. Given this power vacuum at the FDIC it is likely that vice chairman Travis Hill will fill the void, at least temporarily, and potentially permanently given his alignment with Trump and the administration’s desires for rolling back regulations.
On January 10, Hill posted a speech on a strategy for the next administration, stressing that the agency needs “a new direction.” The speech did not address the Bank Control Act proposals or asset managers specifically. Instead, Hill suggested changes to bank supervision and an open-minded approach to technology; debunked claims that climate shocks pose elevated safety and soundness concerns for the financial stability of banks; and promised to reexamine capital controls.
“In conclusion, the FDIC will soon embark on a new course across a range of issues, while still continuing to execute its key responsibilities and mission,” he said. “I discussed a few issues facing the agency today, but there are many others I expect the FDIC to focus on in the coming weeks, months, and years.”
Given this market- and bank-friendly approach, sources say it is unlikely that Hill will design rules giving the FDIC additional oversight over bank ownership of asset managers — especially given that the Federal Reserve already has this authority. In a statement in April, following the initial proposals, Hill said that although it is important to confirm that managers with passivity agreements with the Fed are living up to the commitments, he did not support the proposals because they go well beyond simply asking firms to confirm passivity and would require other types of bank investors to file duplicate notices with the Fed and the FDIC.
The question, therefore, is why Vanguard would act early on this request and enter into a passivity agreement with Gruenberg’s FDIC, knowing that the agency will likely be under the purview of someone who not only favors light regulation but has stated that he does not approve of the exact proposals in question. In addition, sources say the FDIC is vulnerable under cost-cutting plans of the new administration and could even be folded into other banking regulators.
“It may be that it was a bit of a fait accompli, and they were really not giving anything up,” said Stein. “BlackRock took a more negative view, feeling like that was going to impact its business. Vanguard clearly didn’t. I don’t why.”
BlackRock did say in its letter to the FDIC that its passivity agreement would need to be consistent with the version from the Fed, stating that additional reporting could hinder its ability to serve clients.
One source told II that there has been market chatter that some managers are disappointed about Vanguard’s decision to proceed with the agreement, because it sets a new precedent that the FDIC will expect them to follow.
But with a few days to go before the inauguration, the new precedent could be short-lived.
The FDIC, Vanguard, and SSGA declined to comment.
