Are Vanguard and BlackRock at Risk of Drawing Anti-Competition Scrutiny?
Vanguard and BlackRock, Inc. (BLK) may own the market for index investing and money management, but despite their size and reach, they are not likely to draw the attention of anti-competitive regulators any time soon. However, that doesn't mean they won't face lawsuits.
Eric Posner, a Chicago law professor who co-wrote a report with Microsoft economist Glen Weyl and Yale University economics professor Fiona Scott Morton calling for limits on companies an index fund can own in a single industry, told Morningstar that, under current antitrust law, it is illegal for investors to purchase shares of companies if it results in anti-competitive behavior. However, the likes of BlackRock and Vanguard have the passive investor defense to protect them. "If you are just buying shares because you want to enjoy a share of the profits, but you don't plan to control the company – then you are not violating the law, because if you are not exerting any control of the company, you are not going to have any anti-competitive effect," said Posner in the interview. "The institutional investors will argue that they fall within this passive investor exception."
While it is unlikely that someone will sue the institutional investors based on the argument that they are having an anti-competitive effect on the economy, a lawsuit could be filed over their impact on one particular industry. That could result in separate lawsuits based on the sector – be it banking or airlines, for example, said Posner. "The plaintiffs would have a strong case, and for that reason, it's just a matter of time before somebody brings a lawsuit," the professor said. "There has always been a lot of litigation against the airlines for all kinds of stuff, all kinds of anti-competitive behavior, and it's just a matter of time before the plaintiffs bring in the institutional investors and argue that they are either implicitly or explicitly coordinating the airlines."
Posner isn't the only one raising concerns about the reach of Vanguard and BlackRock. Last week, Bloomberg reported that, in under a decade, the two firms could manage as much as $20 trillion in assets combined, based on its data. In its report, Bloomberg pointed to research out of the University of Amsterdam finding that both firms hold more than 5% of over 4,400 stocks. That raises concerns about the influence the two have if they hold shares of two competitors in one industry.
Citing controversial research by Jose Azar, an assistant professor of economics at IESE Business School, Bloomberg noted that airfare rose as much as 7% over 14 years starting in 2001 because institutional shareholders with common holdings placed less pressure on the airlines to compete against each other. BlackRock and Vanguard are among the top five shareholders in three of the largest airline operators, noted Bloomberg.