FTC should stay in its lane, away from investment managers

The Federal Trade Commission (FTC) made a awkward attempt last week to understand whether large-asset owners are unknowingly contributing to antitrust. The event was called FTC Hearing #8: Competition and Consumer Protection in the 21st Century

The “show hearing” in New York felt defensive on their part. Rather than focusing at all on whether large-asset owners are unknowingly contributing to antitrust is truly happening and something to regulate on their own turf, the emphasis was on large stockholders enabling corporate price fixing and how to fix asset owner behavior. 

The latest iteration in this realm of investors-control-everything is referred to as the theory of “common ownership."

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Academics, trade officials, even Jack Bogle, the patron saint of index funds, are suggesting investment managers, particularly big indexers, and even asset owners like pensions and sovereign wealth funds, may be getting too big to trust.

They own too many shares in too many companies, and they are enabling investee companies to ignore competition rules. They say these managers are sending the signal to companies in the same sector they don’t have to compete too hard. 

For the most part, the FTC seems to be doing a fine job. The FTC rightly focuses on controlling business combinations, industry concentration and protects consumers because, as history shows, stronger players can collude to drive out weaker players, fix prices and create oligopolistic industries that gouge consumers. 

So why is the FTC messing with investment management? After all, the Securities and Exchange Commission oversees the investment business, ownership concentration of public companies, proxy voting etc. They have investor protection and shareholder rights in their remit.

The impetus for this FTC “intervention” is based on the fairly mystical, above-mentioned common ownership school of thought. Specifically, it says stewardship activity on the part of investment managers and asset owners might actually be a problem.

At a certain point, stewards can’t be trusted because, the theory goes, they are too big for his own stewardship shoes. They further suggest these big owners don’t actually want portfolio companies to compete so everyone in their index fund cruises along in profitability.

That sounds like investors being satisfied with companies that muddle along in sector mediocrity. An unlikely theory. 

Three things were clear from the hearing on Dec. 6. 

First, the FTC barely understands how shareowner influence via the proxy voting process works or how investment products like index funds actually work. The construction and objectives of an index seemed misunderstood. 

Second, if anti-competitive behaviors are evident from this common ownership dynamic (and there is no real evidence of that), why not regulate the companies involved? The blaming of public shareowners, the voting of proxies or acting as a fiduciary for causing weak competition is mystical enough. Trying to block those things as a solution is absurd.

Finally, this very same asset management industry and these investment managers in particular have been chastised for years for not being engaged enough on their stewardship obligations.

These are the facts: This industry has become very professional as owners. They have extensive proxy-voting policies, highly informed analyses and transparent voting records. They have embraced the duties of stewardship after decades of inattention.

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So too, the industry has honed investment products to match market returns at low cost and with greater “value for money” than ever before to the benefit of a massive base of individual investors. The solutions being proffered by the FTC theorists throw this into full reverse.

Those include the disenfranchisement of millions of underlying fund owners and putting dangerous and uninformed constraints on investment diversification and index construction. 

Whether we like it or not, investment management is not a superpower. Managers don't possess a level of impact and influence to be the solution to all of society’s ills.

It’s role in fixing social injustice, environmental degradation or reducing anti-competitive practices is that of a bit-player when contrasted with front-line overseers like the FTC, environmental regulators and global policymakers.

We think it is best to leave investment management to what it does best — allowing it to focus efforts on supporting savers, pensioners, endowments and retirement security. Mystical theories such as these only serve to distract them from what they are doing well and which they can impact directly. Hands off, FTC.

Kurt N. Schacht, JD, CFA, is managing director of the advocacy division of CFA Institute, a global association of investment professionals.