Asset Managers as SIFIs? No Way, Trade Groups Say

Industry trade groups are calling on the U.S. Treasury Department’s Office of Financial Research to “formally withdraw” what they say is an “inaccurate” report released by OFR in September on asset management firms’ systemic importance.  

The report, Asset Management and Financial Stability, provides an overview of the asset management industry and analyzes how asset management firms and the activities in which they engage can introduce vulnerabilities that could pose, amplify, or transmit threats to financial stability.

The Investment Adviser Association and the Securities Industry and Financial Markets Association’s Asset Management Group told the Securities and Exchange Commission — which is taking comments on the study — in a joint letter Friday that both groups are concerned that the OFR’s study “does not accurately characterize the role of asset managers and the factors that link asset managers and investment products to potential financial market distress.” Further, the groups argue that OFR has not “meaningfully involved” asset managers in the research it conducts.

“It is imperative that the study be formally withdrawn and is not used as the foundation of any regulatory initiative,” said Timothy Cameron, managing director and head of SIFMA’s Asset Management Group, in the joint letter. “We appreciate the opportunity to provide important clarifications and corrections to the OFR Study regarding how our industry functions.”

Industry groups say the flawed OFR report provides little justification for putting asset management firms next in line behind banks and insurance companies to be designated as systemically important financial institutions (SIFIs) by the Financial Stability Oversight Council, which told OFR to conduct the study.

IAA’s executive director, David Tittsworth, added that OFR’s report “fails to identify fundamental differences between the asset management industry and other financial services providers.” Both groups, he added, “welcome the SEC’s decision to solicit comments on the report and look forward to correcting the record on these important issues.”

IAA and SIFMA said that OFR “should evaluate all available data before making any recommendations or requesting any further data from industry participants.” In particular, the groups say “it is important that the FSOC and OFR collaborate with the SEC and industry participants to better understand the asset management industry based on currently available information.”

Indeed, Paul Schott Stevens, president and CEO of the Investment Company Institute, told the SEC in his Nov. 1 comment letter that OFR’s study of the asset management industry “reflects an inaccurate understanding of this industry, particularly registered funds.” For that reason, he said, “the study does not provide any basis whatsoever for FSOC to make any policy decisions.”

Schott Stevens said that OFR’s study “speculates about potential ‘vulnerabilities’ for asset managers that it claims could pose a threat to financial stability, but fails to provide data or historical experience to support its claims.”

The ICI letter focuses primarily on registered funds and their advisors, and offers detailed analysis of mutual fund and investor behavior during periods of market stress, from 1945 through 2008. “Contrary to the OFR study’s suggestions, investors in mutual funds do not redeem precipitously during financial market shocks,” Schott Stevens said. ICI says that OFR’s intention for the study seemed to be “results driven,” and intended to inform FSOC’s consideration of what threats to financial stability, if any, arise from asset management companies, and whether it would be appropriate to designate asset managers as SIFIs and subject them to “enhanced” prudential regulation and supervision by the Federal Reserve Board.