Congressman Bill Huizenga (R-MI), Ranking Member of the Investor Protection, Entrepreneurship, and Capital Markets Subcommittee and Congressman Blaine Luetkemeyer (R-MO), Ranking Member of the Subcommittee on Consumer Protection and Financial Institutions introduced HR 8521, the INDEX Act, to respond to concerns about the consolidation of voting power in a handful of institutions by requiring any asset manager of a passive index fund with more than 1 percent of a company’s voting shares to vote those shares in accordance with the instructions of the fund’s investors or choose not to vote at all.

In an interview with Jim McRitchie’s Corpgov.net, VEA Vice Chair Nell Minow expressed her concerns:

I always love coming down to the right of Republicans when it comes to the free market. There are legitimate reasons to be concerned about the concentration of share ownership in passive accounts. Bob Monks documents some of them in his book, Citizens DisUnited, such as the underperformance of companies with majority ownership from index funds because there are no shareholders with enough of a commitment to the company to provide the essential oversight that markets require to remain vibrant, credible, and efficient.

But the Republicans are not trying to address this problem as a matter of policy; they are trying to undermine even the small impact of investors who do not have the option of selling the stock, diminishing their only other opportunity for expressing their concerns. Index funds are successful with investors because they have provided more reliable returns than managed funds, with lower fees. The data show that they do not always act strictly as fiduciaries in voting proxies. As the late Jack Bogle used to point out, when it comes to portfolio companies, funds like to please their customers and the firms they hope to get as customers, which includes everyone.

What we need is more transparency and better enforcement of fund managers’ obligation as fiduciaries, not proposals that diminish voting power so severely it risks the chaos of failing to meet the requirements of a voting quorum.

Always follow the money. The push for this legislation is not coming from the customers of index funds. It’s coming from corporate insiders who can’t stand the heat from some advisory-only votes on CEO compensation and shareholder proposals. Before you consider this legislative proposal, check to see who is contributing to the campaign funds for those supporting it.