Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on a Proposed Rule to Strengthen Oversight of Large Asset Managers and Other Investors

In America, we don’t let just anyone own a nuclear power plant or operate a bridge. Certain sectors of our economy are critical infrastructure for our country. Our society and democracy couldn’t function without them. There’s no question that our economy and society rely on banks just like we rely on our power grid and our transportation network. Congress put in place guardrails to ensure the ownership and control of this critical infrastructure promotes resiliency and is free of conflicts of interest.

One of those guardrails is the Change in Bank Control Act. The law enables the banking agencies to block controlling investments in banks if the deal would undermine competition, have a negative impact on the Deposit Insurance Fund, or if it wouldn’t be in the public interest for that investor to own the bank, among other factors.

Today, I will put forth a proposed rule for adoption by the Board that would change our approach when it comes to reviewing changes in bank control.¹ As a companion to this proposed rule, I am pleased that the FDIC will also be notifying firms about additional oversight with respect to so-called “passivity” agreements on future acquisitions and changes in control.

The FDIC’s existing rules include an odd provision that, in practice, eliminates the agency’s review of changes in control for many covered transactions. It is highly inappropriate for the FDIC to abdicate the responsibility Congress entrusted to us to safeguard the ownership and control of the banks we supervise.

I am putting forth a motion for the Board to adopt a proposed rule that would simply delete the exemption from the notice requirement for acquisitions of voting securities of a holding company with an FDIC-supervised subsidiary for which the Federal Reserve Board of Governors reviews a notice under the Change in Bank Control Act.

It will be important to coordinate with the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency as we revise our approach. The banking industry and the public would benefit from a consistent and uniform approach to this law.

The notice I am putting forth for Board adoption would also launch a broader inquiry into very large asset managers that are accumulating increasingly large stakes in banks. Other agencies across government are also evaluating similar trends in other sectors of the economy.²

For example, two asset management giants, BlackRock and Vanguard, collectively control over $17 trillion in assets. They now own large enough shares in many banks to trigger statutory guardrails and limitations. These firms, though, claim they are “passive” and do not actually control the banks they own.

They have entered into so-called “passivity” agreements with regulators to avoid these requirements. For example, under the Federal Reserve’s 2020 rule changes and under some existing “passivity” agreements, these asset managers can still be considered “passive” even if they take a seat on the bank’s board.³ Holding a seat on a firm’s board of directors seems to be anything but “passive.”

The proposed rule seeks comment on risks associated with this concentrated ownership, including with respect to conflicts of interest, financial stability, the effect on competition, and the efficacy of “passivity” agreements.

In addition to the proposed rule, after further deliberations since April, the FDIC has determined that it is appropriate to notify certain firms that, going forward, they can no longer rely on existing passivity agreements for direct or indirect investments in additional FDIC-supervised institutions that trigger the presumption of control. These investors should either file a Change in Bank Control Act application or rebut the presumption of control. The FDIC will also seek information from other firms regarding their current investments and stewardship activities.

If the asset management firms would like to rebut the presumption of control for these investments in additional banks, the FDIC will be open to negotiating new agreements.

In my view, and this is a sentiment that has been expressed by other Board members, any new agreements should not rely on “self-certification” as the exclusive or primary means of ensuring compliance. We also need to think carefully about how the agreements address voting and other investor engagement with bank boards and management.

Going forward, the FDIC wants to have access to the information necessary to verify that firms are not acting, directly or indirectly, in a controlling manner with respect to an FDIC-supervised institution.

I want to thank the Board, especially Director Jonathan McKernan, for the discussions on this topic over the last few months, and I believe the actions that we will adopt are timely and important. Thank you.