In his second term, President Donald Trump certainly hasn’t been afraid to go bold — and now it could be the stock market’s turn.
Trump’s administration is eyeing a major overhaul in how the feds oversee the market, The Wall Street Journal has reported.
The slate of reforms under consideration could be the biggest positive development for our financial markets since the early days of the Reagan administration, if not since the creation of the federal securities laws themselves.
It could also finally put the brakes on the rise of “woke capital.”
For years, political activists have been using America’s biggest corporations as vehicles for their social agenda.
They call it “ESG” — environmental, social and governance investing — but it really boils down to pressuring companies to take political stands that most ordinary investors never asked for, from Black Lives Matter to “climate justice.”
The most famous example came in 2021, when a tiny “green” hedge fund named Engine No. 1 managed to get two climate-activist directors on the board of oil giant Exxon Mobil.
How did political actors disguised as investors convince other shareholders to elect oil-hostile directors to the board of a petroleum company?
Simple: They captured the votes of the massive passive index fund giants — BlackRock, Vanguard, and State Street.
These “Big Three” firms hold more than 20% of the entire US stock-market capitalization; one of the three is the largest shareholder in 88% of S&P 500 companies.
Passive index funds were built to give regular Americans an easy way to invest without paying high fees or obsessing over stock-picking.
Rather than trying to guess which stocks will outperform others, these funds simply adjust their holdings to mirror the overall stock market.
Investors’ holdings rise and fall with the market as a whole.
That’s great for the average Joe; I invest much of my own retirement savings with Vanguard’s passive index funds.
They make saving easy, so it’s not surprising that passive index funds have continued to gain market share.
Here’s the catch: While the passive funds have invested passively, they have been active in trying to tell the companies in which they invest how to run their affairs.
Since these funds aren’t picking individual stocks, they don’t bear any cost when they get things wrong.
Their lack of “skin in the game” also made it relatively easy for a certain class of social and political activists — almost always leaning to the left — to capture these funds’ “shareholder engagement” offices.
That’s why we’ve seen the Big Three passive funds pushing companies to take woke actions — from climate pledges to race-based hiring policies — regardless of what most shareholders actually want.
Whenever you’ve seen a company “go woke,” it’s a safe bet that it’s done so with a passive index fund looking over its shoulder.
That’s where the Trump administration’s emerging idea comes in: Instead of letting three giant index fund families dominate shareholder votes, the Securities and Exchange Commission could require them to vote the same way they invest — passively.
How would that work? One straightforward approach, inspired by the INDEX Act proposed by Sen. Dan Sullivan (R-Alaska), would let actual underlying investors — ordinary Americans — who hold index-fund shares decide how those shares should be voted.
In reality, though, that’s impractical.
Most passive-fund investors don’t want to wade into corporate governance any more than they want to pick stocks themselves — and managing such a process would be unwieldy and expensive.
That’s why the most sensible solution is also the simplest: Passive funds should mirror how the rest of the shareholders vote.
In other words, just follow the crowd. Passive investors should be passive voters.
And here’s the good news: The SEC has the power to make this happen right now.
It helped create today’s shareholder-voting system through its own guidance, and it can fix it the same way — by issuing a rule that keeps index-fund managers from using other people’s retirement savings to advance political causes.
For too long, left-wing activists have used corporate annual meetings as a workaround to push policies they could never get through Congress.
If the White House acts, it can shut down this backdoor political machine and return corporate America to its real job: creating value for workers, retirees, and everyday investors.
By making passive investors passive voters as well, the president has a big, bold opportunity to make American capital markets even greater.
James R. Copland is a Manhattan Institute senior fellow and a member of the SEC’s Investor Advisory Committee.
This story originally appeared on NYPost
