Fidelity Management & Research Co. urged the Financial Stability Board to drop its “irredeemably flawed” plan to identify too-big-to-fail investment funds and it called on U.S. firms to reject the proposal.
The FSB, the global regulator headed by Bank of England Governor Mark Carney, is “out of step with other regulators, academics and industry experts,” Fidelity said in its response to the FSB’s public consultation on the plan. Its “destructive” proposal “would fail to reduce systemic risk, but it would harm funds, managers, investors and markets.”
If the FSB and the International Organization of Securities Commissions push ahead with designating global funds and asset managers as systemically important using their proposed methodology, U.S. members of both regulators “should affirmatively reject them,” the company said.
The U.S. members of the FSB are the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Department of Treasury.
The FSB and IOSCO said in March that the failure of an asset manager could “cause or amplify significant disruption to the global financial system,” putting the world’s largest fund managers in line for tougher rules. Firms such as Pacific Investment Management Co., Fidelity Investments and BlackRock Inc. had challenged this premise in response to an initial proposal last year.
The global regulators’ mandate from the Group of 20 nations “did not direct them to develop” a systemic fund designation methodology, Fidelity said. “Nor are they empowered to apply such a methodology to U.S. investment funds and asset managers,” it said.
“Their proposed methodologies appear to capture exclusively U.S. investment funds and asset managers, yet neither their rulemaking process, nor the procedures proposed for designating funds and managers, would meet the requirements of U.S. administrative or Constitutional law,” Fidelity said.
U.S. Senate Banking Committee Chairman Richard Shelby said on March 25 that lawmakers should “ask if the influence that the FSB seems to exert” over U.S. policymaking is “appropriate.”
Fidelity said that regulating the activities of large investment funds, rather than designating them as too big to fail, “is a more appropriate way to analyze and regulate the asset management industry and capital markets more broadly.”
The FSB already ranks banks and insurance companies by their potential to cause a global meltdown. For lenders led by HSBC Holdings Plc and JPMorgan Chase & Co., designation as a global systemically important bank has brought higher capital requirements and tougher scrutiny intended to make them more resilient in a crisis.
The FSB is seeking views until May 29 on how to identify too-big-to-fail fund managers and hasn’t yet spelled out the rules they may face.
Asset managers are facing increased scrutiny from regulators because of “a huge wall of money moving into the capital markets from the banking system and regulators wanting to be sure that the markets and institutions are going to be sound in systemically stressed conditions,” IOSCO Secretary General David Wright said in an April 23 interview.
Assets of the global fund management industry grew by 13 percent in 2013 to $146 trillion, according to data from TheCityUK, which promotes the City of London. As much as 80 percent of all assets outside of the banking and insurance industries are in the hands of such finance companies, broker-dealers and investment funds, according to the FSB.