06.14.22

Sullivan Testifies Before Banking Committee: We Need To Stop Fund Managers From Controlling “Virtually Every Large U.S. Corporation”

WASHINGTON—U.S. Senator Dan Sullivan (R-Alaska) testified before the Senate Banking Committee today on the challenges posed by large asset managers that wield the enormous voting power of millions of passive index fund investors to control “virtually every large U.S. corporation.” Senator Sullivan spoke onthe legislation he introduced last month—the Investor Democracy is Expected (INDEX) Act—thataddresses problems stemming from the consolidated voting power within Wall Street’s largest investment advisers. 

Sullivan said he crafted the legislation after witnessing the hypocrisy of America’s largest banks black-balling oil and gas development in Alaska and across the country while propping up the Chinese Communist Party, even as American families face record-high energy costs. This initial frustration uncovered a much larger concern about the sheer power that is consolidated among the three largest investment advisers: BlackRock, Vanguard, and State Street.

“The impetus for this legislation was due to my ongoing frustrations with many of America's largest banks and insurance companies that undertook policies to start blackballing oil and gas investment development in Alaska,” Senator Sullivan said to the Senate Banking Committee. “At the same time, these financial institutions, banks, and insurance companies were eagerly and continue to eagerly do business with Communist China. . .These financial institutions do this in part because of pressure from their largest shareholders, the big three investment advisors, and their index funds.” 

The INDEX Act would require investment advisors of passively-managed funds to vote in accordance with the instructions of fund investors—not at the discretion of the adviser. Deconsolidating this voting power will neutralize the dominance of these investment advisers and foster a healthier, more competitive, and more democratic corporate governance system. 

“At its core, the INDEX Act is politically and policy-neutral focused instead on the very real and unprecedented power amassed by the big three investment advisors that should be a concern for us all,” Senator Sullivan said. “It would return voting power back to the beneficial owners of the shares, not the index fund managers. In many ways, it's a logical next step that was undertaken by Dodd Frank when broker-dealers used to be allowed to vote shares they held in street name. It would neutralize the massive power that the largest investment advisors have amassed and it would empower the real beneficial owner of these shares. It would foster a healthier and more competitive and democratic corporate governance system, which is what we should want and certainly what the American people expect.” 

Original cosponsors of Senator Sullivan’s legislation include: Senators Pat Toomey (R-Pa.), Mike Crapo (R-Idaho), Chuck Grassley (R-Iowa), John Cornyn (R-Texas), Kevin Cramer (R-N.D.), Bill Hagerty (R-Tenn.), Marco Rubio (R-Fla.), Thom Tillis (R-N.C.), Steve Daines (R-Mont.), Cynthia Lummis (R-Wyo.), John Kennedy (R-La.), and Rick Scott (R-Fla.).

FULL REMARKS: 

Thank you Mr. Chairman and I sincerely appreciate the opportunity to testify here and thank you for holding this important hearing on this important issue. I want to thank Ranking Member Toomey in particular for his leadership and work with my team on the bill that’s already been described as the Investor Democracy Is Expected Act or the INDEX Act. And I want to thank other members of the committee. There's several here who are also co-sponsors of this bill. 

Mr. Chairman, I'll be frank with you. You and I have talked about it. The impetus for this legislation was due to my ongoing frustrations with many of America's largest banks and insurance companies that undertook policies to start blackballing oil and gas investment development in Alaska. And in my view, blackballing the proud American workers who do this very necessary work for our country. We need energy. While at the same time, these financial institutions, banks, and insurance companies were eagerly and continue to eagerly do business with Communist China – blackballing American energy workers – no problem with investing in Chinese communist activities. Why are they doing this? Why were they doing this? Well, I found out these financial institutions do this in part because of pressure from their largest shareholders, the big three investment advisors, and their index funds. In time, my Alaska-centric frustration uncovered a much larger concern that many of you have already described today about the sheer power that is consolidated among the three firms that were already mentioned in the massive distortion in our public markets that it creates.

Here again, are the astonishing numbers that were already mentioned by Senator Toomey. With regard to Blackrock Vanguard and State Street, they manage around $20 trillion in combined assets, are the largest owner shareholder in around 90% of the S&P 500, and cast nearly one-quarter of all votes at annual meetings for the public companies in America. These numbers were even larger before the recent market correction. In many ways, as you mentioned, Mr. Chairman, this is a success story. Investors are benefiting from greater diversification and lower fees.

However, there have been unintended consequences, especially the unprecedented consolidation of ownership and voting power of these three firms. These companies wield this market dominance through behind-the-scenes engagement with company management and they can steer our public markets towards policies that they or others prefer – bypassing political accountability of our legislative process.

This should concern all of us, regardless of a political party. Some may like or even applaud the positions these entities currently advocate for, but as we have all seen, leadership at these kinds of firms can change. Just look at the ongoing Twitter saga right now. At its core, the INDEX Act is politically and policy-neutral focused instead on the very real and unprecedented power amassed by the big three investment advisors that should be a concern for us all. And I know this is becoming a concern on both sides of the aisle. I've had discussions with many of my Democrat and Republican colleagues. In fact, just a few months ago, Senator Bernie Sanders held a Budget Committee hearing on these same issues. The bill simply requires that investment advisors of passively managed funds vote proxies in accordance with the instruction of fund investors – the American people – and not at the discretion of the advisor.

It would return voting power back to the beneficial owners of the shares, not the index fund managers. In many ways, it's a logical next step that was undertaken by Dodd Frank when broker-dealers used to be allowed to vote shares they held in street name through the – although the beneficial owner was not allowed to vote those shares, that was changed by Dodd Frank.

Mr. Chairman, You mentioned already some of the complexities, but Senator Toomey has also mentioned some of the ways in which these complexities of implementation could be addressed. The INDEX Act would accomplish important goals. It would neutralize the massive power that the largest investment advisors have amassed and it would empower the real beneficial owner of these shares. It would foster a healthier and more competitive and democratic corporate governance system, which is what we should want and certainly what the American people expect.

I will close with a quote from Jack Bogle, the founder of Van Guard and the father of the Index Fund who voiced a warning before his passing in 2019. He said quote, ‘if historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U. S. corporation. Public policy cannot ignore this growing dominance.’

Mr. Chairman this day is upon us. This prophetic warning has proven itself out and we need to act in a bipartisan manner on this important issue. I look forward to the rest of the hearing today and working with all of you on this issue, and I would encourage all of my colleagues to consider the INDEX Act as a bipartisan solution. Thank you again, Mr. Chairman, ranking member Toomey for the opportunity to testify today. 

###