INDEX Act Requires Index Funds to Ask Shareholders How to Vote Proxies, Changing Corporate Power Dynamics

The INvestor Democracy is EXpected Act, or INDEX Act, is shaking up how massive index funds handle corporate governance. This bill mandates that investment advisers managing passively managed funds—think those giant funds tracking the S&P 500—must now ask the actual shareholders how they want their shares voted on non-routine corporate matters. If the adviser controls more than 1% of the total voting power for a specific vote, they can no longer just vote the block as they see fit; they must vote proportionally based on the instructions they receive from the fund owners. This change is designed to shift voting power away from a few powerful fund managers and back to the millions of people who own those funds through their 401(k)s or brokerage accounts.

Your 401(k) Gets a Voice

For most people, the biggest impact of the INDEX Act is that you might actually get a say in the corporate decisions of the companies your retirement savings are invested in. Currently, if you own a mutual fund that tracks an index, the fund manager (like the adviser at Vanguard or BlackRock) votes those shares. Under the INDEX Act, for non-routine votes—meaning anything that isn't simple housekeeping, like electing directors or approving major mergers—the adviser has to send you the materials and ask for your instructions. If you, the fund owner, tell them to vote ‘Yes’ on a proposal, they count your vote. If you don't respond, they can’t vote your shares at all on that issue. This is a huge shift. If you’re a teacher or a construction worker with a retirement account, you now have a direct line to influence corporate policy.

The Proportional Problem and the Cost of Silence

While the goal is noble—investor democracy—the practical implementation creates some interesting wrinkles. The core requirement is proportional voting: the adviser can only vote the shares for which they receive instructions. If 70% of fund owners respond, the remaining 30% of shares go unvoted. This means that if a large chunk of shareholders are too busy or simply don't care to return the voting instruction form, the total voting power of that massive index fund in a corporate election could drop significantly. This could change the outcome of close votes at major companies, potentially leading to increased complexity in shareholder meetings. Think of it this way: if a company needs 51% of all outstanding shares to approve a merger, and 30% of the index fund's shares sit unvoted, that merger just got a lot harder to pass.

The Administrative Headache and the Safe Harbor

For the investment advisers, this means a major administrative overhaul. They now have to send out proxy statements, annual reports, and voting instruction forms—physically or electronically—to potentially millions of fund owners, giving them at least five business days to respond. The bill does allow the fund itself to bear the cost of sending these materials, which could slightly increase operating expenses for the index funds you own. However, the bill also offers advisers a significant out: a “safe harbor.” If the adviser decides not to solicit voting instructions from fund owners for a non-routine matter, they are protected from being penalized or accused of violating their fiduciary duty for failing to vote those securities. This provision is designed to give them flexibility, but it also means that if an adviser doesn't want the hassle, they can simply choose not to ask for your input on important votes, effectively reducing their engagement in corporate governance on your behalf.