Vanguard has warned investors that US regulators might limit the size of the stakes the company is allowed to hold in firms. This could increase costs and raise risks for some of the world's largest index funds.
The world's second-largest asset manager, with assets under management of $9.3 trillion as of May, recently updated the disclosures for dozens of funds. The company indicates an increased risk that authorities could force it to comply with long-standing but rarely enforced caps on ownership of individual bank and utility stocks.
Vanguard, along with the other two passive investment giants BlackRock and State Street Global Advisors, is criticized for its size and its voting behavior on climate and social issues.
In January, passively managed US funds surpassed their actively managed counterparts in investment volume for the first time.
Progressive activists have long been sounding the alarm about the power of large passive investment complexes, which together own nearly 25 percent of many U.S. companies.
In the past three years, conservatives have also joined them, complaining that the fund companies are using their shareholdings to advance liberal causes, which they refer to as 'woke capitalism.'
Historically, regulators have allowed investment funds to exceed the 10 percent cap on ownership of bank and utility stocks as long as they do not seek to take a management role.
But the Federal Deposit Insurance Corporation is considering imposing stricter conditions on these exemptions, while Republican state attorneys general have pressured the Federal Energy Regulatory Commission to review Vanguard's ability to hold large stakes in publicly traded utilities.
Vanguard's latest disclosures, filed last week with the US Securities and Exchange Commission, warn that the Pennsylvania-based asset manager may not always be allowed to exceed ownership limits in the future.
It is not always possible to obtain relief, and there is increasing uncertainty about how much relief regulators will grant asset managers like Vanguard for property restrictions," said the asset manager.
Without regulatory relief, Vanguard may be forced to sell securities and instead acquire indirect exposures to affected holdings through derivatives such as total return swaps or investments in subsidiaries.
The asset manager told the Financial Times that the new risk warnings "make clear the potential negative consequences of losing regulatory relief on fund costs and performance, as well as the potential tax implications for investors.
We continue to work with policymakers to answer questions, address concerns, and mitigate these risks," said Vanguard.
A trade association representing asset managers, the Investment Company Institute, reiterated its concerns that strict regulation could affect the returns for millions of US investors.
Given the importance, we encourage regulators to carefully consider these impacts and avoid changes that hinder the ability of funds to help Americans invest for a secure financial future," said the ICI.
Neither BlackRock nor State Street immediately responded to requests for comment.
Ben Johnson, Head of Customer Service Solutions at Morningstar, said that the increasing size of the largest asset managers has inevitably led to stricter regulatory scrutiny and that the pressure is likely to continue regardless of who wins the national elections in November.
The likelihood of [unfavorable decisions] only increases if these companies and their stakes in individual businesses continue to grow," he said.
Jeff DeMaso, editor of the newsletter Independent Vanguard Adviser, said on Wednesday that "the days in which index funds received a regulatory 'free pass' are over.
Vanguard, which manages $10 trillion, is a different beast than Vanguard, which manages $1 trillion," wrote DeMaso.
