New SEC Rules Reshape Asset Management: How BlackRock and Vanguard Will Adapt

New restrictions on U.S. asset managers' stewardship primarily target industry giants BlackRock and Vanguard, according to a recent analysis. 

Managing nearly $22 trillion collectively, these firms have thrived on their low-cost passive funds. 

However, their immense influence has drawn scrutiny from across the political spectrum, leading to new regulatory measures.

On February 11, the U.S. Securities and Exchange Commission (SEC) revised its guidance on fund managers’ reporting obligations, particularly those advocating for environmental, social, or governance (ESG) issues. 

The new directive requires them to file a more detailed 13D disclosure instead of the simpler 13G form. Critics argue this shift could stifle investor input on pressing matters like climate change and corporate governance.

A study by Matt Moscardi, CEO of Free Float Analytics, highlights BlackRock’s extensive reach, with the firm filing 13G disclosures for 2,363 of 4,529 publicly traded U.S. companies in the fourth quarter alone. Vanguard followed closely, filing for 2,182 companies. These figures underscore their significant sway over the economy. In comparison, Dimensional Fund Advisors, the third-largest filer, submitted only 390 forms within the same period.

Moscardi emphasizes that BlackRock and Vanguard’s dominant role allows them to shape corporate elections, as they typically hold 10% or more of company shares. The SEC’s new guidance could curb this influence by discouraging firms from pressing for governance changes, fearing challenges to their 13G filing status.

“To avoid disputes, they might have to take a softer approach,” Moscardi explained. While firms may still raise concerns, they could hesitate to push for structural changes like annual board elections, even when their policies support such measures.

One pressing question is whether a company might petition the SEC to label BlackRock or Vanguard as activists if they inquire about governance issues, receive an unsatisfactory response, and subsequently vote against management’s stance. “Companies are in the driver’s seat when it comes to engagement,” Moscardi noted.

Neither BlackRock nor Vanguard provided comments on the matter. Both firms initially paused their stewardship meetings with portfolio companies to assess the new guidelines. However, BlackRock has since resumed engagements, stating compliance with the updated requirements by emphasizing its role as a passive investor in discussions.

Attorney Marc Rotter of Ropes & Gray pointed out that smaller asset managers might also encounter difficulties under the new guidance. Although the largest firms dominate the landscape, mid-sized managers with substantial stakes in certain companies could find themselves navigating similar complexities.

With regulatory shifts reshaping asset management, how will firms balance compliance with their influence on corporate governance?

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