FedFin Assessment: Index-Fund Passivity Debate Could Touch Broader Control Questions

As we noted, the FDIC board late last week faced the unusual and perhaps unprecedented situation of a staff resolution supported by its Chair and one Democratic Director that was countered by a different proposal from Republican Directors, with both options finally tabled due to objections from the Acting Comptroller.  Both proposals address the extent to which index-fund managers can hold what would otherwise be controlling stakes in banking organizations exempted by virtue of passivity commitments that have come under fire from all sides.  We expect the next move will be an inter-agency RFI launched by Mr. Hsu and accepted by the FRB as an interim step to a possible inter-agency rule about which the Fed appears to have considerable qualms.  Should this falter, Mr. Hsu also said that he is open to the kind of rulemaking CFPB Director Chopra proposed should the Fed prove unwilling to work with the FDIC on next steps.  This report analyzes these competing proposals; final action or even interim examiner intervention in this arena has considerable impact not only on asset managers, but also on bank corporate governance and market capitalization.  Changes are also possible to the liberal standards set by the FRB in 2020 defining when a controlling interest or even certain seemingly-controlling conditions such as a board seat do not constitute the legal control forcing BHC designation  (see FSM Report TAKEOVER10).