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Considering the Index Fund Voting Process: Hearing Before the S. Committee on Banking, Housing, and Urban Affairs, 117th Cong. (2022) (testimony of John C. Coates IV, John F. Cogan, Jr. Professor of Law and Economics, Harvard Law School).

Abstract: Index funds present a governance dilemma. On the one hand, index funds provide huge benefits to individual investors, such as low fee and low opportunity cost diversification. On the other hand, their success has so concentrated ownership as to challenge the legitimacy and accountability of customary delegated governance. Given their benefits, legislation should be cautious, provisional, practical and cost-effective. It should rely on Securities and Exchange Commission (SEC) oversight to adjust to evolving markets, and enlist rather than try to supplant market forces. Senate Bill 4241 does not meet these criteria, nor do other blunt efforts to transfer voting power from index funds to investors or other institutions, or worse, to strip investors of governance rights altogether. Better would be reforms such as (a) low-cost quarterly reporting, (b) qualitative disclosures on fund voting policy formation, (c) complex-level conflict of interest rules, and (d) SEC-supervised pilots in which funds provide investors with practical ways to provide information about how they would like governance rights used. Clarifying SEC authority to regulate index providers (e.g., S&P) would also be useful. Finally, the SEC should have at least as much authority to supervise bespoke, risky products that exploit the “index” brand, but lack conventional index funds’ investor-friendly attributes, as it does over index funds themselves.