BlackRock to Pimco Lobby Slows U.S. Move Toward Oversight

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The open portion of a meeting of the Financial Stability Oversight Council at the Treasury Department in this Nov. 23, 2010 file photo in Washington, DC. Close

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Photographer: Chip Somodevilla/Getty Images

The open portion of a meeting of the Financial Stability Oversight Council at the Treasury Department in this Nov. 23, 2010 file photo in Washington, DC.

The location of the National Credit Union Administration suits its place in the hierarchy of U.S. financial regulators. Unlike its better-known peers, which are all clustered near the Capitol or the White House, the agency is a 20-minute drive from downtown Washington in good traffic.

That hasn’t stopped senior executives at two of the world’s largest asset-management firms, BlackRock Inc. and Pacific Investment Management Co., from trekking out to the agency’s Virginia offices. Their mission: Convince Chairman Debbie Matz their companies don’t threaten the financial system.

Heading up an agency that monitors thousands of mostly small credit unions, Matz is an unlikely big-time lobbying target. Her popularity stems from a different role -- she holds a seat on a secretive uber-regulatory panel that is assessing which financial companies should be overseen more like Wall Street banks to prevent a replay of the 2008 credit crisis.

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The contacts with Matz are part of the fund industry’s three-year campaign to influence members of the Financial Stability Oversight Council. The lobbying is one reason the FSOC, as the panel is known, has slowed deliberations on whether the firms should be formally designated “systemically important,” two people with knowledge of the process said.

“The asset managers are really going all out,” said Joseph Engelhard, a former Treasury and congressional aide who is now senior vice president at Washington consultant Capital Alpha Partners LLC. “It’s a full-court press, and so far, they’re doing it well.”

Four Votes

Since the council’s designation requires a two-thirds vote, the fund companies can avoid the more costly oversight if their lobbying can sway four of its 10 members. The votes by Matz or by Roy Woodall, a representative with insurance industry expertise, count as much as those cast by the chairmen of the Federal Reserve or Securities and Exchange Commission.

As part of their search for allies, the firms have stoked a turf battle between the FSOC and the SEC, which is the primary overseer of the fund industry and whose commissioners are wary of losing the authority. Treasury Secretary Jacob J. Lew, the chairman of the FSOC, is also President Barack Obama’s top economic adviser and a member of his cabinet, while the SEC is designed to be insulated from political considerations.

At one point, the contretemps led Lew to rebuke SEC Chairman Mary Jo White, according to two people briefed on the incident. Like others interviewed for this story, they spoke on condition of anonymity because the conversations were private.

‘Best Strategy’

“The asset managers are going to be more successful making their case to members who are more independent of the administration, that’s the best strategy for them,” said Stephen Myrow, managing partner of Beacon Policy Advisors LLC, an investment research shop in Washington.

Barbara Novick, a vice chairman and co-founder of BlackRock, the world’s largest asset manager, said her visits have been valuable because the panel members may be more familiar with banks than investment firms.

“A lot of it has been truly educational and less advocacy,” she said in an interview.

Spokesman Dan Tarman of Pimco didn’t respond to requests for comment. Adam Banker of Fidelity Investments, which also has lobbied, declined to comment. Suzanne Elio, a Treasury spokeswoman who handles FSOC matters, declined to comment.

The authors of the Dodd-Frank Act established the FSOC in part on the premise it would be pointless to tighten rules for banks if other big financial players could take risks without enough oversight. The panel, which gathers at the Treasury, held 10 meetings last year, two of which included public sessions.

Designating AIG

Other voting members are the heads of the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Commodity Futures Trading Commission and the Federal Housing Finance Agency.

The FSOC last year approved systemic designations for insurers American International Group Inc. and Prudential Financial Inc. and the finance arm of General Electric Co. It then signaled it would review asset managers who, like the other designees, would join Wall Street banks under Fed supervision.

While the council hasn’t discussed the matter publicly, the Treasury’s research office conducted an industry study for the FSOC that was published in September. It highlighted the sizes of BlackRock, Pimco, Fidelity and Vanguard Group Inc. The four companies manage almost $10 trillion for investors such as pension funds, 401(k) plans and families saving for college.

Regulators and lawmakers have long debated the risks. While asset managers weren’t bailed out in 2008 like big banks, one product line -- money-market mutual funds -- figured in the crisis. Panicked investors withdrew hundreds of billions of dollars when one fund’s shares fell below the typical $1 value.

Halting Run

The withdrawals threatened to cause a more serious shock because the largest banks depend on short-term loans from the funds to finance their operations. To stop the run, the government had to promise money-fund investors it would temporarily cover any losses.

In their lobbying materials, the fund companies say 2008 isn’t an argument for putting their entire businesses under systemic oversight. They say they differ from banks because their funds aren’t backed by U.S. guarantees; fund companies don’t make big trades with their own assets; and because clients direct their investments and can withdraw them at any time.

If regulators force fund companies to hold capital cushions or limit managers’ strategies, costs could rise and investor returns could drop, the companies have said. Big clients like pension funds might flee.

‘Kafka Novel’

Jeff Connaughton, a former Senate aide who worked on parts of the Dodd-Frank law, said the biggest fund companies “absolutely” should be studied by the FSOC. The 1998 implosion of hedge fund Long-Term Capital Management, which had to be bailed out by its Wall Street creditors to avoid a larger market collapse, shouldn’t be forgotten, he added.

“We’ve already had a crisis triggered by an asset manager,” Connaughton said. “This needs to be examined.”

FSOC officials haven’t explained publicly how decisions about asset managers will be made. Groups including the U.S. Chamber of Commerce, which has criticized the panel, have told lawmakers that lack of transparency is one reason to rein it in.

The secrecy and uncertainty feel like “living in a Kafka novel” said Brian Reid, chief economist of the Investment Company Institute, the mutual-fund industry’s main trade group.

“I’m on trial but don’t know who is accusing me or what I’m accused for,” Reid said in an interview. “All of a sudden, it happens.”

Plan Backfires

BlackRock and Fidelity started lobbying after Dodd-Frank was enacted in 2010, meeting with the Fed late that year to discuss the issue, Fed records show. The industry also was pushing the SEC to tighten rules for money-market funds, hoping narrower measures would stave off systemic regulation, said people briefed on the strategy. The plan backfired in 2012 when the SEC failed to reach consensus and then-Chairman Mary Schapiro left the issue in the FSOC’s hands.

The industry’s campaign got new momentum after last year’s study by the Treasury’s Office of Financial Research, which warned that the largest fund managers could disrupt markets by “herding” investors seeking higher returns into certain products. The funds also “could pose, amplify or transmit threats” to the financial system through their use of derivatives and participation in shadow-banking markets for repurchase agreements and securities lending, the report said.

The study was shared with the SEC, where staff members and commissioners disagreed with many findings, according to two people briefed on the discussions.

Treasury Call

In late September, SEC chief White notified the FSOC that her agency wanted to seek public comments on the study, the people said. The FSOC hadn’t planned to invite public responses, and when the SEC went ahead, some members were infuriated by the move. Lew called White to express his displeasure, and she apologized for getting ahead of the process, the people said.

John Nester, a spokesman for the SEC, declined to comment.

When the report came out, the FSOC rocketed to the top of Fidelity’s Washington agenda, said a person familiar with the firm’s strategy. At one private meeting, another person said, Fidelity executives said they were worried they’d be more likely to fall under extra oversight than BlackRock because that firm’s chief executive officer, Laurence Fink, is close to the Obama administration.

Brian Beades, a BlackRock spokesman, said the comment about Fink “must have been made in jest.” He said BlackRock has been making the case to regulators that the best way to address concerns about risks outlined in the Treasury’s report “is to improve those products and practices, not simply name firms based on the amount of their assets under management.”

Lobby Tour

BlackRock set out to meet with representatives of all the voting FSOC members, according to government documents and people familiar with the matter. In October, according to records posted on the credit union agency’s website, Novick visited Matz at the regulator’s headquarters in Alexandria.

Novick met with Matz and the agency’s chief economist, John Worth, to discuss the FSOC decision-making process and the research office study, the records show. Six weeks later, Novick visited Worth again. Pimco general counsel David Flattum met with Matz and Worth in November.

Matz, 63, isn’t new to Washington politics and lobbying. Before taking over at the credit-union regulator in 2009, she was on its board from 2002 to 2005 as an appointee of President George W. Bush. She also was a member of President Barack Obama’s economic transition team. John Fairbanks, a spokesman for Matz, said she wouldn’t comment on FSOC matters.

Public Pressure

The asset managers targeted White at the SEC as well. In January, lobbyists from BlackRock and Allianz SE, the parent company of Pimco, visited her at the commission’s headquarters. They were joined by Tim Pawlenty, president of the Financial Services Roundtable, whose membership includes BlackRock and Allianz, two people with knowledge of the talks said.

The industry also sought to stir up public pressure. In December, 16 ex-regulators sent a letter to the Wall Street Journal, published under the title, “Don’t Regulate Asset Managers as If They Were Banks.”

The group was organized by one of the signers, former SEC Commissioner Paul Atkins, now at Patomak Global Partners LLC, people briefed on the matter said. His firm’s clients include the Investment Company Institute and Fidelity. Atkins said in an interview the letter had nothing to do with his consulting work.

In recent weeks, the fight surfaced publicly in Congress. Subcommittees in the House and Senate summoned Richard Berner, head of the Treasury’s research office. Before the sessions, BlackRock’s Novick, the trade group’s Reid and Fidelity lobbyist J.J. Johnson briefed aides from both parties, two people familiar with the discussions said.

‘Fundamental’ Misunderstanding

At the hearings, the lawmakers lit into Berner.

The report “reflected a fundamental lack of understanding of the asset-management industry,” North Carolina Republican Patrick McHenry, chairman of the House Financial Services subcommittee on oversight and investigations, said on Feb. 5.

Berner told lawmakers the study was meant to inform the council, not to single out any asset managers or immediately bring the industry under more oversight. “I think it is responsible to put the information out there,” he said at a Jan. 29 Senate hearing.

The SEC’s White didn’t paper over her agency’s differences with the report. She told the Senate Banking Committee Feb. 6 that the SEC had “agreed to disagree” with the Treasury’s research department on some matters.

Math Problem

After the uproar, the FSOC slowed its work on asset managers and began to study whether another firm, Berkshire Hathaway Inc., should be designated, according to two people with knowledge of the process.

The fund companies don’t expect the issue to go away. They are working to beat back a similar designation process by global regulators, which could spur the FSOC to act.

If the U.S. council does take up the matter, the arithmetic won’t favor the industry.

In the most recent action on a company, the panel’s vote was 7-2, with one abstention, in favor of a systemic designation for Prudential. The ’no’ votes came from Woodall, the insurance expert who has been generally skeptical about extending oversight, and Edward DeMarco, who at the time was acting head of the Federal Housing Finance Agency. DeMarco has now been replaced at the agency and on the board by Melvin Watt, a former Democratic congressman who lobbyists see as more pro-regulation.

Even if the industry were able to win over Matz, Woodall and White, for example, it still would be one vote short of stopping a two-thirds majority.

SEC’s Move

A middle ground between systemic designation and the status quo remains possible. Mary Miller, the Treasury’s undersecretary for domestic finance, said Feb. 6 that the oversight council could decide either to designate asset managers or address the issue “through other regulatory measures.”

The panel’s decision could be influenced by the SEC, which may be going its own way.

The agency is again working to complete rules for money funds. In addition, White said in a speech last week she had ordered the agency’s staff to come up with a way to increase oversight of big asset managers. She said the FSOC’s systemic designation process should “avoid a rigidly uniform approach solely defined by the safety and soundness standard that may be more appropriate for banking institutions.”

Myrow, the Beacon Policy analyst who is also a former Treasury official, said industry executives believe that in the end the council will tag a few big fund companies. Regardless of any business reasons against that move, regulators don’t want to appear weak in the wake of the 2008 crisis.

“Politics is driving this,” Myrow said.

For Related News and Information:

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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