Yellen Urged to Steer Global Regulators From Too-Big-to-Fail Tag

Federal Reserve Chair Janet Yellen and other U.S. officials should push global regulators away from designating individual asset managers and investment funds systemically important, the industry’s lobby group said.

The Financial Stability Board, a group of international regulators that makes recommendations to the Group of 20 nations, plans to identify too-big-to-fail investment funds that could face stricter oversight. Asset managers including BlackRock Inc. and Vanguard Group Inc. argue that the FSB is focusing too much on size and say its proposal wouldn’t reduce risk to the financial system.

U.S. regulators should “use their authority and role within the FSB process to redirect it away from one that seems in a misbegotten way focused on designation of entities,” Paul Schott Stevens, chief executive officer of the Investment Company Institute, said in an interview Monday.

Global regulators should instead move “toward a much more promising direction, which is looking at activities and practices that go all the way across the asset-management sector,” he said. The ICI, based in Washington, is the mutual fund industry’s main lobbying group.

The Financial Stability Oversight Council, a group of U.S. regulators led by Treasury Secretary Jacob J. Lew, discussed in 2013 whether BlackRock Inc. and Fidelity Investments should be designated systemically important and subjected to Fed oversight. After an industry campaign against designation, the FSOC gradually shifted its approach to focus on products and activities.

FSB Influence

Stevens, however, said he thinks the FSOC, under FSB influence, could change its focus again.

In a letter to Yellen, Lew and Securities and Exchange Commission Chair Mary Jo White dated May 28, Stevens said the ICI is concerned that the FSB process “ultimately could be used to exert multilateral influence on the FSOC to expand the regulatory reach of the Federal Reserve itself to include U.S. funds, managers and capital markets.”

Stevens noted that Fed Governor Daniel Tarullo is playing a key role in the FSB’s work on asset managers. Tarullo is chairman of the FSB’s Standing Committee on Supervisory and Regulatory Cooperation.

Fed spokesman Darren Gersh confirmed that the Fed had received Stevens’s letter.

Tarullo said in January that asset managers could pose potential risks in a future crisis if they are forced into fire sales, and said new regulations might be warranted to promote stability.

Size Threshold

The FSB and the International Organization of Securities Commissions said last year that investment funds with more than $100 billion of assets should be assessed to determine if they’re too big to fail. The regulators retained that methodology in its revised plan published in March.

Stevens pointed out that so far the FSB and IOSCO are excluding pension and sovereign wealth funds “from any assessment for systemic risk.”

“Some of these large pools of managed assets are many times the size of the U.S. stock and bond funds that the methodologies would target,” he wrote. Under the FSB’s approach, potential candidates for systemic-risk designation would be “almost solely U.S. firms.”

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