Why It Matters

The House Financial Services Committee's Subcommittee on Capital Markets held a hearing on June 25, 2026, examining whether regulations keep pace with the explosive growth of passive investing, with lawmakers clashing over whether index funds protect or endanger retirement savers.

Index funds and passive investment products now hold more than half of U.S. equity mutual fund and exchange-traded fund (ETF) assets, a seismic change from two decades ago. The hearing featured sharp disagreement over whether this concentration of voting power in a handful of mega-managers helps or harms ordinary Americans.

The Big Picture

ETFs have grown by 66% between 2020 and 2024 alone, accelerated by the Securities and Exchange Commission's (SEC) 2019 ETF rule that modernized how these products come to market by speeding up timelines and eliminating red tape. Average expense ratios for equity mutual funds have fallen from roughly 1% in 2000 to around 0.44% in recent years, with index funds averaging approximately 0.05%.

The hearing examined four pieces of legislation: H.R. 3248, the American Ownership and Resilience Act; H.R. 7187, the Clarity for Compensation Act; H.R. 9329, the SEC Reform and Restructuring Act; and the Consumer-Led Enhancement of Annuity and Insurance Registration (CLEAR) Forms Act, which requires the SEC to create forms for annuity and insurance registration.

H.R. 9329 arrived on the table just one week before the hearing, introduced on June 18, 2026. Chair and Rep. Ann Wagner (R-MO-2) sponsored the SEC reform measure alongside three cosponsors. According to Wagner's press release, the bill will prioritize investor protection and eliminate onerous and ineffective programs while ensuring the SEC is accountable to the people.

The hearing also reflected broader shifts in the Trump administration's regulatory posture. SEC Chair Paul Atkins announced in his keynote remarks at the 2026 Reagan National Economic Forum that the SEC had proposed rescinding the prior administration's climate disclosure rule. According to Atkins, the SEC exists to serve all investors, not to advance an agenda of the politicized few.

Underlying the hearing was a deeper philosophical tension about market efficiency and investor protection. Active investors play an important role in price discovery by researching companies, analyzing fundamentals, and incorporating new information into market prices. Passive investment products have delivered substantial benefits to investors by providing low-cost diversification and broad market exposure.

Yet the data reveals complications. Morningstar data shows investors in low-cost funds consistently achieve better net returns than those in high-cost funds. The investor return gap, or the difference between fund total return and dollar-weighted investor return, is smaller for passive funds. Yet passive investors experienced declines of up to 50 percent during market downturns.

What They're Saying

Rep. Brad Sherman (D-CA-32) raised alarm about index funds investing in China, arguing they often buy variable interest entities in the Cayman Islands rather than actual Chinese companies. Sherman stated that variable interest entities in the Cayman Islands do not come with the rights that actual shareholders have. He expressed concern that 144 sanctioned companies and their affiliates have made their way into emerging markets funds, with some playing an integral role in the Chinese military-industrial complex.

Natalia Renta, Associate Director for Corporate Governance & Power at Americans for Financial Reform, warned that SpaceX stock is poised to end up in people's 401ks within just a few trading days of its IPO. She characterized the SpaceX IPO as "a new way to transfer wealth from working people to billionaires."

Jeffrey Ptak, Managing Director at Morningstar, called for strong fiduciary standards to ensure investors are placed in appropriate, low-cost products. He expressed skepticism of legislation that would expand access to complex or illiquid alternative investments for retail investors without commensurate protections. Ptak urged clearer, simpler fund disclosures rather than adding complexity.

Tom Quaadman, Chief of Government Affairs and Public Policy at the Investment Company Institute, testified in support of H.R. 3248 and the CLEAR Forms Act. The Investment Company Institute represents funds with over $40 trillion in assets under management and serves more than 120 million U.S. investors. Quaadman advocated for harmonizing rules across different investment product types to reduce regulatory arbitrage and called for expanding access to private markets for a broader range of retail investors.

Matthew Ringgenberg, Emma Eccles Jones Professor of Finance at the University of Utah's David Eccles School of Business, supported policies that enhance transparency in fund voting and stewardship activities. Academic literature shows that stocks held predominantly by passive investors exhibit greater return co-movement, potentially reducing diversification benefits. Studies also suggest common ownership by institutional investors may dampen product market competition in industries like airlines and banking.

Political Stakes

Renta and Americans for Financial Reform (AFR), a coalition of roughly 200 consumer, labor, and special interest groups, are pushing for stronger shareholder voting rights and corporate governance standards as passive investing grows. AFR raised concerns about how the rise of passive investing concentrates shareholder power in ways that may harm ordinary investors and expressed concern that index funds automatically absorb newly public and potentially risky companies into retirement portfolios.

The Investment Company Institute's specific ask is to reform fund proxy rules to lower quorum thresholds, expand retail voting programs, and pass ETF share class legislation. Morningstar's specific ask is to improve transparency around hidden costs of passive index strategies. Morningstar's written testimony frames the hearing's significance around the principle that cost transparency, daily liquidity, and standardized disclosure made ETFs a success story for Main Street investors.

Market analysts characterized the SEC's pivot as a shift away from "regulation by enforcement" toward a "common sense" framework designed to foster innovation and streamline capital formation. The White House described an Executive Order's purpose as an effort to end the outsized influence of proxy advisors that prioritize radical political agendas over investor returns.

Yes, but

Not all witnesses embraced expansion of alternative investments. Renta opposed weakening SEC disclosure requirements or accredited investor standards and opposed H.R. 9329. She called for pass-through voting reforms that would allow individual investors to direct how their shares are voted and urged Congress to strengthen, not weaken, anti-greenwashing and Environmental, Social, and Governance (ESG) disclosure rules.

Regulatory fragmentation between the SEC and state regulators creates duplicative compliance burdens estimated in the billions annually. Retail investors are far less likely to vote proxies than institutional investors, and legal and communication barriers prevent funds from reaching shareholders efficiently.

The Bottom Line

The June 25 congressional hearing on active and passive investing revealed deep disagreement over whether the market's structural shift toward index funds protects ordinary Americans or exposes them to new risks, with a narrowing legislative window forcing Congress to choose between competing visions of capital markets reform.

The hearing sets the stage for committee action on multiple bills. H.R. 3248 remains under consideration alongside the other three measures. The SEC has already approved 48 ETF share class applications since November 2025, signaling administrative movement even as Congress debates legislative remedies.

Active mutual funds continued to face headwinds in 2025 even as active ETFs set inflow records, suggesting the market itself is sorting through the active-passive divide. The Investment Company Institute has made fund proxy modernization a top legislative priority, and the subcommittee's focus suggests movement is possible before the legislative window closes.

Rep. Ann Wagner stated that the hearing's goal is to understand what trends in active and passive investing mean for retail investors and retirement savers. Americans can now choose from hundreds of types of index funds, ETFs, and mutual funds covering nearly every sector of the economy.

Access the Legis1 platform for comprehensive political news, data, and insights.

Spot something wrong? Report an issue with this article