A Treasury Department study that found money managers could pose threats to the U.S. financial system is flawed and should be scrapped, the mutual-fund industry’s trade group said.
“This report simply doesn’t serve as a predicate for action” by officials charged with studying asset managers and other nonbank financial businesses under the 2010 Dodd-Frank Act, Paul Schott Stevens, president of the Washington-based Investment Company Institute, said today in a telephone interview.
The ICI plans to file a comment letter today with the U.S. Securities and Exchange Commission saying the study, intended to help regulators decide whether the industry should be subject to oversight by the Federal Reserve, is based on the false premise that asset-management activities pose systemic threats and backs the assertion with weak and inaccurate data, Stevens said.
Money managers could endanger the financial system when reaching for higher returns, herding into popular asset classes or amplifying price movements with leverage, the Treasury Department’s Office of Financial Research said in the Sept. 30 report. The study was conducted by the OFR to help the Financial Stability Oversight Council analyze whether asset managers should be considered systemically important and therefore subject to Fed supervision.
“The reports seems to start with the premise that, of course, asset management poses risks to the financial system at large, and then proceeds to hypothesize a whole bunch of circumstances to support that conclusion,” Stevens said.
Suzanne Elio, a Treasury spokeswoman, had no immediate comment on the study or the ICI letter.
The oversight council is authorized under Dodd-Frank to identify companies that could threaten stability. The Fed can impose on those firms tighter capital, leverage and liquidity rules and demand measures including stress testing for crisis scenarios and plans for winding down. The council, or FSOC, is led by Treasury Secretary Jacob J. Lew and includes Fed Chairman Ben S. Bernanke.
Companies overseeing a combined $53 trillion in assets, led by fund giants BlackRock (BLK) Inc. and Vanguard Group Inc., can contribute to asset-price increases and magnify volatility during sudden shocks, according to the Treasury’s report.
Some large firms are concerned that they may face new rules that would hurt their competitiveness, according to three industry executives who asked not to be named because they weren’t authorized to speak publicly. Managers want the SEC to address any systemic threats with regulation focused on certain activities, rather than impose company-specific restrictions or obligations, the executives said.
BlackRock, the world biggest money manager, said in its own comment letter today that the SEC shouldn’t penalize large firms simply for their size.
“Size does matter, but we actually think they have it in reverse,” Barbara Novick, the firm’s vice chairman, said today in a telephone interview. “A larger firm tends to be more diversified, tends to be stronger financially because of that.”
Stevens also said the FSOC has been reviewing nonbank financial companies without enough participation from those companies or sufficient transparency. He cited a closed FSOC session yesterday at which the council held what Treasury’s Elio described as “an initial discussion on asset management.”
“No one knows what was discussed,” Stevens said. “These regulatory policy judgments are of vast importance and shouldn’t be made in a black box.”
The Treasury should commission “a more methodical study of asset management and do so in conjunction with the SEC,” he said.
FSOC has designated three nonbanks as systemically important financial institutions, or SIFIs: American International Group Inc. (AIG), General Electric Co.’s finance unit and Prudential Financial Inc. Prudential, the second-largest U.S. life insurer, lost an appeal of that decision and opted last month against filing a lawsuit to contest the ruling.
MetLife Inc. (MET), the largest U.S. life insurer, has said it’s in the last stage of review by FSOC and isn’t ruling out contesting a SIFI designation. The company has said bank-like regulations would raise prices for customers and may miss risks related to insurance liabilities.
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