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Funds as SIFIs Would Be ‘Too Burdened to Succeed’: ICI Chief

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Designating mutual funds as systemically important fnancial institutions (SIFIs) “would impair the single best tool available to average Americans for retirement saving and individual investment — as well as a key source of financing in our economy,” said Paul Schott Stevens, president and CEO of the Investment Company Institute, on Tuesday.

Speaking in the afternoon on the opening day of ICI’s 56th annual conference in Washington, Schott Stevens focused his opening remarks on the current efforts by the Financial Stability Oversight Council (FSOC) as well as global regulators to examine whether “asset managers and investment funds — including U.S. mutual funds — should be treated like the largest banks” and designated as SIFIs.

“What does designation as a SIFI mean?” Schott Stevens asked. “Under the Dodd-Frank Act, the Federal Reserve conducts ‘enhanced supervision’ of all SIFIs. A designated fund would need to meet bank-level capital requirements of 8% — purportedly for ‘loss absorption’ — with the costs falling to investors.”

A designated fund, Schott explained, “would have to cover other costs as well — the costs of its Federal Reserve supervision, and a share of the costs of the FSOC and its research arm. All of these costs would flow through to fund investors.”

These costs, he continued, “would fall uniquely on those designated as SIFIs — likely to be the largest U.S. funds or fund families.” But as a group, he argued, “the largest U.S. funds are highly efficient and relatively low-cost within their asset classes. They have an average expense ratio of just 31 basis points.”

Bottom line: “It would not take much of a ‘SIFI premium’ to increase the fees of these funds significantly,” which would make it “hard for them to compete against the many similar funds that are not designated SIFIs,” Schott said.

“In our wildly competitive fund marketplace, designation won’t make a fund ‘too big to fail’ — it will render it too burdened to succeed.”

Schott Stevens also expressed his worries about the Federal Reserve Board becoming the “prudential supervisor” of any fund designated as a SIFI — “broad power that would even reach to the fund’s portfolio management.”

The Fed, he said, “could substitute its ‘prudence’ for the fiduciary judgments of a SIFI-designated fund’s investment advisor. During times of market turmoil, for example, the Fed might impel a fund to maintain financing for a troubled bank, even if the fund’s manager were to conclude that holding that position is not in the best interests of the fund’s shareholders.”

The Financial Stability Oversight Council met Monday at its asset management conference to hear from the industry and “determine what, if any, risks exist in the asset management industry, before we consider what, if any, action the council should take in this area,” Under Secretary of the Treasury Mary Miller noted during her remarks. “Our work to assess these risks is ongoing, and it will be based on a thorough analysis of information from a wide array of sources.”

She emphasized that the council did not come to the Monday conversation “with any predetermined outcome,” reiterating a recent comment made by Treasury Secretary Jack Lew, that “there’s no one at FSOC who knows the outcome of this process because we’re still in the fact-finding stages.”

Just as the FSOC held its asset management conference “to help educate members of its various agencies about asset management,” Schott Stevens noted that only weeks ago, “the media were reporting that the council was hustling two large mutual fund managers toward designation. In the face of such news, it’s understandable that questions have surfaced about the fairness of this whole process.”

He noted that more than 43 House members and nine senators have written to Lew to express concerns with the FSOC’s proceedings.

“House Financial Services Committee Chairman Jeb Hensarling, R-Texas, has called upon the FSOC to ‘cease and desist’ all designation activities until Congress has an opportunity to understand the Council’s activities. We agree,” Schott Stevens said.

Schott Stevens said that funds should not fall under the SIFI moniker because “regulated funds and their managers do not pose risks to the financial system at large; designation of funds or asset managers as SIFIs is unnecessary; and cramming our funds into a framework of bank-style regulation will be deeply harmful to funds, their investors, and the capital markets.”

Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, noted in a statement after the FSOC conference that “SIFMA’s view remains that designating asset management firms or funds as SIFIs is unnecessary and would negatively impact investors.”

He argued that “an activities-based approach is the most effective way to regulate the types of behavior that could impact financial stability,” and that FSOC “should allow asset managers’ primary regulator,” the Securities and Exchange Commission, “to complete current reform initiatives and evaluate their cumulative impact before moving forward with any sort of SIFI designation.”

In explaining further about the current reform initiatives being undertaken by the SEC and Federal Reserve, Tim Cameron, managing director and head of SIFMA’s Asset Management Group, told ThinkAdvisor that SIFMA believes FSOC should hold off on any potential designation until the SEC releases its further money money reform rules, which he expects to be out in the “next three or four months — or sooner.”

Cameron said that the Fed is also looking at the “tri-party repo” space, “which impacts the underlying securities in money market funds.” He said the Fed has been “examining the overall operational resiliency of the tri-party repo market.”

Check out ICI: Too-Big-to-Fail Label Would Hurt Mutual Fund Investors on ThinkAdvisor.


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