Vanguard Joins Fidelity to Fight FSB’s Too-Big-to-Fail Proposal

Vanguard Group Inc., the world’s second-biggest money manager, has joined the fight against a plan by the Financial Stability Board to identify too-big-to-fail investment funds, calling its proposal deeply flawed.

Vanguard, which oversees $3.3 trillion in assets, is “deeply disappointed” by the global financial regulator’s approach, chief investment officer Tim Buckley and risk management head John Hollyer wrote in a May 29 letter to the board, posted on Vanguard’s website.

Being identified as too-big-to-fail could require investment firms to hold more capital against their assets, hampering profitability. Tougher capital requirements are meant to let institutions absorb losses, and more scrutiny by regulators can ensure they can be safely wound down if they fail.

The FSB has been taking public comments on the proposal. “If bank-like prudential regulations were applied to mutual funds and investment advisers, they would not only be extremely ill-suited to limit systemic risk, but they would also threaten to disrupt the capital markets and drive up the costs of investing for millions of investors saving for college, retirement, and other long-term goals,” Buckley and Hollyer wrote.

Vanguard said it would be “wholly premature” for any fund to be identified as too-big-to-fail without further evaluation.

The letter came a day after Fidelity Management & Research Co. described the FSB’s proposal as destructive and urged the regulator to drop the plan.

Tougher Rules

The FSB and International Organization of Securities Commissions raised the prospect of tougher rules for the world’s largest fund managers in March, when it said that the failure of an asset manager could “cause or amplify significant disruption to the global financial system.”

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.

In its proposal last year, the FSB said investment funds with more than $100 billion in assets should be assessed to determine if they’re too big to fail.

Rather than focusing on individual investment managers because of their size or type, Vanguard said regulators should look instead at activities by investment managers that increase risk. Mutual funds, Vanguard said, should get the same treatment as pension funds, which don’t raise systemic risk concerns because their assets are long-term.

The FSB, which brings together regulators and central bankers from the Group of 20 nations, already ranks banks and insurance companies by their potential to cause a global financial 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.

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