Bloomberg Businessweek - USA (2020-12-21)

 FINANCE Bloomberg Businessweek December 21, 2020

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RELATED

PROPOSALS.

DATA:

BLACKROCK

THE BOTTOM LINE Regulators have long assumed

large index funds exert little influence on companies

are beginning to question that.

market share by innovating and lowering prices. In

theory at least, an owner of rival companies would

generally prefer they don’t compete forcefully, as

doing so can eat into profits. For example, a 2018

study found that, when the same institutional inves-

tors are the largest shareholders in branded drug

companies and generic drugmakers, the generic

companies are less likely to offer cheaper versions

of the brand-name makers’ drugs.

It’s an idea that not so long ago was on the

fringes of antitrust debates. But it’s become more

prominent along with index fund companies’

growth and increased concern among policy-

makers about monopolies. The funds don’t have

to notify regulators in advance of acquiring a large

number of shares in a company, as is required of

other kinds of investors, such as activist hedge

funds waging proxy battles to gain control.

The FTC proposals might end that exemption.

“It’s untenable to assume we don’t need notice

of acquisitions where either one firm or the same

firms own individually or in the aggregate a signifi-

cant percentage of the voting shares of competitors,”

says Bilal Sayyed, the director of the FTC’s Office of

Policy Planning, who initiated the proposals.

One potential change could require fund fami-

lies to report their aggregated holdings to the gov-

ernment, giving regulators more insight into the

level of common ownership. The bigger worry

for fund companies is buried in a separate, pre-

regulatory notice in which the FTC asks for pub-

lic comment on whether mutual funds should lose

their filing exemption because they engage in a

broad range of activities that fall under the label

“shareholder engagement.” These activities include

communications from funds that nudge portfolio

companies to hold the line on executive pay, lower

carbon emissions, increase workforce and board

diversity, and meet other goals they consider part

of good corporate governance. Fund companies

today point with pride to such efforts.

Mutual funds’ current antitrust-reporting shield,

dating to 1978, was based on the idea that they

bought shares solely for the purpose of investment

and paid scant attention to how companies were

managed. “The exemption is pretty narrow, and it’s

hard to see [how] what the institutional investors

are doing fits into the exemption,” Sayyed says. In

one of its notices on the proposals, the FTC says a

discussion about executive pay could turn into one

about how performance should be measured, delv-

ing into the basic business decisions of a company.

The fund companies say engagements are just

part of taking care of their clients’ money and dis-

pute the possibility that their ownership is harming

competition. Tara McDonnell, a spokeswoman for

BlackRock Inc., says it’s still analyzing the propos-

als. “Our investment and stewardship activities

are guided by our fiduciary obligations,” she says.

A State Street Corp. spokeswoman says that index

funds save investors money and that the proposals

“could have a significant impact on index products

and other types of investment funds and their inves-

tors without a clear benefit.”

Regulatory review could make operating an

index fund more complex. In cases where compa-

nies have to notify regulators of share purchases, the

agencies can request more information, and more

time, to determine if the deal might harm competi-

tion. “They ought to limit outright the amount these

companies can own, but at least a review is worth-

while, because it gives the commission a hook to

ask” if ownership is too concentrated, says Graham

Steele, a senior fellow at the anti-monopoly group

American Economic Liberties Project. He published

a paper in November describing the fund companies

as part of a new “money trust.”

The proposals are in the early stages and could

change, and what happens next may depend on the

views of President-elect Joe Biden. The FTC won’t

vote to scrap or advance either proposal until a

public comment period ends in February, after the

inauguration. The Trump-appointed chairman of

the FTC, Joe Simons, is expected to leave, and the

rest of the commission will be split evenly between

Republicans and Democrats until he’s replaced. But

the politics of antitrust don’t break down on pre-

dictable party lines—there’s been growing interest

in the issue on the Left and the Right.

Index funds could eventually find themselves

caught between the demands of environmental,

consumer, and civil rights groups,whichwant

them to be more accountable for thebehavior of

companies they own, and regulato

who may see activism as a reasonto

end their filing exemption. In a twist,

another part of the FTC’s proposals

would relieve activist funds from having

to report acquisitions of 10% or lessof

company, so long as they don’t alsoho

more than 1% of a competitor. Butwith

out a review exemption, the 1% rulecou

snag index funds, which often holdmor

than that in rival companies. The upshot

that index funds could have less flexibil

than those controlled by corporateraid

—David McLaughlin and Annie Massa

 Percentage of

management proposals

BlackRock voted

against, July 2019 to

June 2020

Mergers,acquisitions,

andreorganizations

14

Executivecompensation

16

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