U.S. Risk Panel to Solicit Input on Asset-Manager Oversight

U.S. financial regulators took a step toward increasing their scrutiny of large asset managers such as BlackRock Inc. and Fidelity Investments.

The Financial Stability Oversight Council today approved a request to seek input from industry executives and the public on criteria for judging whether asset managers’ activities could threaten the financial system. The effort will focus on investment funds’ liquidity, leverage, and plans in case a large asset manager fails or closes.

“It’s the job of the council to make sure that we’re alert to the risks, and when necessary, if necessary, we respond with appropriate policies,” Treasury Secretary Jacob J. Lew, who heads the council, said during a meeting in Washington.

The move is the latest step by the council to focus on asset managers’ strategies and operations, including the move into harder-to-sell instruments. The council previously looked at whether to designate one or more asset managers as systemically important financial institutions, which would have subjected them to more stringent oversight.

Financial firms designated as systemically important by the council are put under Federal Reserve supervision and can be subjected to tougher capital, leverage and liquidity requirements. Under pressure from the industry and Congress, the council this year slowed the process of considering whether to label individual asset managers, including BlackRock and Fidelity, as systemically important.

Yellen’s Focus

“The council may want to evaluate whether financial stability risks could arise from liquidity risk, leverage, and interconnectedness, even if policies are in place to protect individual investments and funds,” Fed Chair Janet Yellen said during the meeting. “I’m particularly attuned to risks that could come from the build-up of leverage across the financial system.”

In a statement, BlackRock said it plans to provide the feedback sought by regulators. “We welcome the council’s focus on products and activities commonly used by many market participants,” BlackRock spokeswoman Tara McDonnell said.

The largest U.S. asset managers have campaigned against being labeled systemically important since shortly after the council was created in 2010. The industry’s lobbying has included meetings with officials from FSOC member agencies, and briefings to both Democrats and Republicans in Congress.

The opposition intensified when the Treasury’s Office of Financial Research published a study in September 2013 warning that the largest asset firms could disrupt financial markets by “herding” investors seeking higher returns. The report said exchange-traded funds could “amplify financial shocks” by pooling assets into illiquid investments.

Dodd-Frank Effort

Under its latest approach, the risk council is seeking input on whether funds, particularly those holding less liquid assets, could spread losses across the financial system if they came under stress. Funds could be vulnerable to “fire sales” of hard-to-sell assets if they don’t have enough cash or liquid securities to meet redemptions, the council said in its notice.

Separately, the council also asked whether asset managers have trouble moving assets to a different adviser “particularly during a period of financial-market stress.” It also asked whether funds are reliant on a few key service providers, such as third-party firms that value complex investments.

Lehman Chaos

FSOC’s focus on asset managers is part of the government’s effort under the Dodd-Frank Act to bolster oversight of the financial system and avoid a repeat of the chaos that stemmed from the failure of Lehman Brothers Holdings Inc. in 2008.

Asset managers, which are now overseen by the Securities and Exchange Commission, argue that they differ from banks because their funds aren’t backed by U.S. government guarantees and fund companies don’t make big trades with their own assets. Clients also direct their own investments and can withdraw them at any time.

“This request is a positive step in the right direction and the industry stands ready to work with regulators to provide input,” said Tim Pawlenty, chief executive officer of The Financial Services Roundtable, said in a statement. “We hope that FSOC officials will seriously consider applying this same approach to other aspects of their work, including FSOC’s ongoing review of non-bank institutions that have already been labeled as systemically risky.”

SEC’s Oversight

SEC Chair Mary Jo White, speaking at today’s meeting, said FSOC’s efforts with asset managers would complement her agency’s new oversight plan for the industry. White said last week the SEC’s rules hadn’t kept pace with the evolution of the $30 trillion mutual-fund industry, and vowed to develop rules aimed at funds’ investments in harder-to-sell assets and derivatives.

“Today’s request for comment is a constructive complement to the SEC’s initiatives and the information obtained may further inform our initiatives,” White said today.

Seeking a request for comment doesn’t necessarily mean the council will take any action. It also doesn’t eliminate the possibility that the council could eventually decide to designate an asset firm systemically important.

“There’s no predetermined view of what the conclusion is,” Lew said today. “It’s very important that we determine whether or not there is a need for action.”

The council, which has 10 voting members, also includes the heads of the Fed, SEC and Federal Deposit Insurance Corp.

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