Dec 27 (Reuters) - The U.S. Federal Deposit Insurance

Corporation has reached a deal with Vanguard that will

strengthen the rules under which the investment management giant

can take big stakes in large U.S. financial institutions,

according to an agreement published by the watchdog on Friday.

The agreement gives the FDIC more ability to monitor

Vanguard's investment activities and spells out what is allowed

as a passive investor in FDIC-supervised banks. Its goal was to

ensure the largest asset management firms, including Vanguard

and BlackRock, do not influence the business decisions of the

biggest U.S. banks even when they acquire large stakes via

indexed, or passive, investment funds.

In a press release announcing the agreement with Vanguard,

Jonathan McKernan, a director of the FDIC, said academic critics

have raised concerns about competitive risks of concentrated

ownership and the concentration of power in a handful of

institutional investors.

McKernan said the agreement should allow banking

regulators to address those concerns.

According to the deal, Vanguard is strictly prohibited

from engaging in activities that influence the management or

policies of institutions regulated by the FDIC, or their

subsidiaries. Vanguard said this is in accordance with its

current practices.

"Vanguard is built around passive investing and has long

been committed to working constructively with policymakers to

ensure that passive means passive," a Vanguard spokesperson

said.

Through "passivity agreements," investors commit to

regulators that they will not exert influence on the banks in

which they have a stake.

FDIC will monitor Vanguard's investment activities,

especially any informal interactions Vanguard has with the

management of FDIC-regulated banks.

There was no disclosure of a similar agreement having

been reached with BlackRock. BlackRock could not immediately be

reached for comment. The FDIC did not immediately respond to a

request for further comment.