SEC Commissioner Robert J. Jackson Jr. urged regulators to create greater transparency as to proxy voting by institutional investors, particularly index funds and other passive investors. Mr. Jackson stressed that such institutional investors cast votes in corporate elections on behalf of more than 100 million families that own shares in funds.

In testimony before the Federal Trade Commission Hearing on Competition and Consumer Protection, Mr. Jackson asserted that "we are at a crucial moment in financial history, with corporate elections now being decided by only a handful of index fund managers." He criticized the SEC's current rules for leaving investors "in the dark" about how these institutional investors are voting on issues that "underlie American families' savings."

Mr. Jackson acknowledged that the rise of passive funds has benefitted individual investors, but possibly at the expense of corporate accountability. Mr. Jackson questioned whether index funds may be pursuing their own interests as opposed to the interests of their investors. As a result, Mr. Jackson stated, "a few large institutions today vote millions of American families' money in corporate elections, all of which has a substantial impact on our economic future."

Mr. Jackson called on the SEC to take steps to ensure that ordinary investors understand how institutions are using their influence. He recommended the SEC start by examining the voting practices of institutional investors, who increasingly dominate corporate elections. According to Mr. Jackson, studies that use advanced data-science techniques to figure out information on institutional voting from SEC filings are critical to understanding the issue.

Commentary / Joel Mitnick

The FTC hearing focused on economic theory suggesting that large passive index funds structurally interfere with competition in industries in which the funds are invested across the board. That makes sense as a focus of the FTC because the FTC is charged with protecting and promoting competition through the economy. For the SEC, however, competition is merely one factor among several with which the agency is statutorily charged in policing the nation's capital markets. As a result, while the FTC looks to protect consumers from anticompetitive practices, the SEC looks to protect investors from rigged markets. Those differences in mission lead to different outcomes in terms of possible remedies. Therefore, while antitrust economists who are critical of index fund diversification advocate remedies such as limiting fund investments to one firm in an industry (and no more than 1 percent in that one firm's rivals), Commissioner Jackson advocates instead for disclosures that would better inform the investing public about conditions that may affect their savings. As the debate about fund investments in "common ownership" continues, it will be interesting to see whether the FTC and SEC continue to diverge in their views of the potential problems and potential remedies or whether we see a drift to "common" middle.

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