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“It is imperative that the study be formally withdrawn and is not used as the foundation of any regulatory initiative,” said Timothy Cameron, managing director and head of SIFMA’s Asset Management Group, in the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.
The OFR study “appears to be ‘results-driven’,” assuming from the outset that asset managers pose systemic risks, Schott Stevens says in the ICI letter. “The OFR Study appears to conclude a priori that asset managers pose risks to the financial system at large and then hypothesizes circumstances to support that conclusion. Further study should take a more objective approach.”
SIFMA and IAA laid out five “concerns” they have with the OFR study:
–The study does not provide an accurate or comprehensive description of the asset management industry.
–The study contains a number of unsupported conclusions and overly broad assertions – including mischaracterization of the role of asset managers, exaggeration of the risks associated with asset manager failure and overstatement of the risk of widespread redemption – that lead to an inaccurate view of the industry and would not promote sound policy.
–The study does not sufficiently account for existing regulation, including rules implemented since the financial crisis, that regulate investment advisors, funds and other investment vehicles, and the securities, derivatives and other investment instruments in which asset managers’ clients invest.
–OFR appears to have used only a fraction of available data in its research and, consequently, additional analysis is necessary to provide the FSOC a comprehensive view of the industry and its relevance to the financial stability of the United States.
–The study fails to address the fundamental questions a regulator must consider to evaluate the asset management industry and design and implement any additional regulation to address possible sources of risk that may arise from the industry, and cannot serve as the foundation for informed policy discussions.
Check out FSOC Targets Asset Management Firms as ‘Systemically Important’ on ThinkAdvisor.