June 27, 2019

Big 3 Index Funds On Course to Control 40% of S&P 500 Stock

Remember the classic scene in the movie “Network” in which Ned Beatty’s character, CEO Arthur Jensen, regales Howard Beale with his fire & brimstone “corporate cosmology” speech?  It’s his vision of a “perfect world” led by “one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock, all necessities provided, all anxieties tranquilized, all boredom, amused. . .”

If that’s your cup of tea, then I’ve got great news for you – a recent study says that fulfillment of Arthur Jensen’s vision may be right around the corner.  Here’s an excerpt from an FT article on the study:

BlackRock, Vanguard and State Street Global Advisors are on course to control four votes out of every 10 cast at large US companies, as regulators and policymakers probe the wider consequences of their increasing dominance of the investment market. The influence of the Big Three, which have mopped up trillions of dollars of index investments in recent years, is being viewed by politicians as a possible antitrust issue. BlackRock, Vanguard and SSGA, which collectively manage more than $14tn, account for a quarter of votes cast at S&P 500 companies. This is set to grow to 34% over the next 10 years, and 41% in 20, according to academics at Harvard Law School.

The authors of this study are concerned that having the Big 3 control 40% of the S&P 500 will make them unduly deferential to management.  I sure hope so – because it seems to me that a far more likely scenario is some variation of them telling us to  “Kneel before Zod!”

I know I’ve mentioned this same scene from Network in at least one blog, but what can I say?  My cultural frame of reference consists almost entirely of 1970s movies & TV shows. Throw in the “Superman II” reference in the last line & I have no choice but to admit that I’m a walking Dad Joke.

“Bad Actors”: Proposed Legislation Would Tighten SEC Waiver Process

Companies that run afoul of the antifraud provisions of the securities laws can find themselves barred from, among other things, using Reg D, Reg A, Form S-3, or qualifying for the forward looking statements safe harbor.  In some instances, it isn’t necessarily equitable or in the best interests of investors or the market to impose these sanctions, and so the SEC has developed a waiver process.

Rep. Maxine Waters (D-Cal.), Chair of the House Financial Services Committee, recently introduced the “Bad Actor Disqualification Act of 2019,”  which would significantly clamp down on the SEC’s ability to grant bad actor waivers. This excerpt from a recent Sidley memo summarizes the bill’s impact on the waiver process:

The Disqualification Act would eliminate the Commission staff’s ability to grant waivers and instead would impose a three-step process to obtain a permanent waiver. First, a company would need to petition the Commission for a temporary waiver, which the Commission could grant “if the Commission determines that such person has demonstrated immediate irreparable injury.” The temporary waiver would be for a period of 180 days, and all temporary waiver requests (whether granted or not) would be published with an explanation from the Commission as to the rationale for granting or not granting the waiver.

Second, the Commission would publish notice in the Federal Register “of the pendency of the waiver determination and … afford the public and interested persons an opportunity to present their views [on the waiver application], including at a public hearing.” Third, the Commission would hold a public hearing during which it would consider granting a permanent waiver. The Commission would not be able to consider the “direct costs to the ineligible person associated with a denial” and would need to find that the waiver “(i) is in the public interest; (ii) is necessary for the protection of investors; and (iii) promotes market integrity” in order to grant the waiver.

Rep. Waters issued a statement saying that the legislation is intended to protect investors by implementing a “rigorous, fair, and public process for waiving automatic disqualification provisions in the law.” But the Sidley memo contends that, among other things, it would further politicize the waiver process & make settlements with the Commission less attractive to companies.

Earnings Estimates: What If Your Analyst Estimates Are From “Fantasy Island?”

Few things cause more consternation in the C-suite than an analyst whose earnings estimates for your company are wildly out of line with management’s. If that happens to you, this Westwicke Partners blog offers some advice about how to respond.

A member followed up with a very good point –  you need to keep Reg FD compliance in mind when you consider Westwick’s advice here!

Geez, I did it again – another 1970s pop culture reference in the title of this blog.  I swear, at this point I’m not even conscious that I’m doing it.

John Jenkins