At a Federal Trade Commission ("FTC") hearing, industry professionals and experts debated the possible anticompetitive implications of institutional investors holding non-controlling equity interests in competing firms.

As described more fully in a Cadwalader memorandum, the FTC hearing explored two possible theories of competitive harm: (i) do passive index funds that invest across an industry structurally disincentivize target firms from competing and (ii) do such investments foster anticompetitive collusion?

One panel was composed of industry professionals, including a member of the Big Three (i.e., BlackRock, Vanguard and State Street), a large union pension fund, several investor/industry trade associations and several corporate governance experts. The industry panel made several overarching points, including that (i) index funds have become a driving force for our nation's savers of retail investors and (ii) prohibiting institutional investors from investing in a diversified portfolio within industries would be a "death knell" to such funds.

A second panel (featuring several antitrust economists and law professors) argued that investors who hold a significant percentage of securities in large firms in concentrated industries may be unlikely to push firms to become more competitive, cutting costs and prices. According to the expert panel, the funds' most rational strategy for maximizing profits would be for each industry member to charge prices as high as the markets will bear, leading to each firm's maximum profitability. Under this theory, management would understand and be responsive to its large investor incentives to avoid fierce competition.

Commentary / Joel Mitnick

The good news for the asset management industry is the apparent consensus that more investigation is needed before either the FTC or SEC adopts a theory of harm and fashions a remedy to address it; the bad news for the asset management industry is that the current lack of clarity may lead to full-blown FTC and SEC investigations into asset management. Multiple hearing witnesses encouraged the FTC to use compulsory process (subpoena power) to obtain data from asset managers and the industries in which they invest and to subpoena target management documents to determine whether corporate management strategy decisions are being based, at least in part, on an understanding of its investors' relative interests.

Asset managers may want to get ahead of the curve by understanding what their strategy documents say about their expectations of management incentives. Asset managers may want to begin developing their own "white papers" to forestall further government concerns.

By contrast, activist funds should take appropriate steps to implement antitrust compliance programs to avoid seeming to facilitate collusion between or among competing firms in which they are invested.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.