SEC's White backs opposition to systematic risk label

(Bloomberg) — Asset managers trying to forestall stricter U.S. oversight appear to have found an ally in the chairman of the Securities and Exchange Commission.

SEC Chair Mary Jo White took up their arguments yesterday, lending support to firms including BlackRock Inc. and Fidelity Investments which are fighting efforts to officially label them sources of “systemic risk” to the financial system.

“I don’t think you are overreacting to the process,” White told industry executives at a conference sponsored by their trade group, the Investment Company Institute.

Asset managers sponsor products such as mutual funds and hedge funds that invest $53 trillion for individuals saving for retirement and institutions such as pension funds. They argue that some proposals under consideration by the Federal Reserve would make mutual funds more expensive and hurt their ability to make the best decisions for investors.

Traditionally regulated by the SEC, the largest firms could come under Federal Reserve oversight if the Financial Stability Oversight Council, an umbrella group of U.S. regulators, decides they require tougher scrutiny because their collapse could trigger broader instability. The council was established by the 2010 Dodd-Frank Act, which sought to prevent a repeat of the 2008 financial crisis.

White, who has a seat on the 10-member council, hasn’t said how she’d vote. Two firms are currently under review: BlackRock, which manages $3.8 trillion worldwide, and Fidelity Investments, which manages $1.9 trillion.

Turf Battle

Bureaucratic turf is also at stake. A designation would partly take those firms out of the SEC’s ambit and allow the Federal Reserve to impose new rules, including bank-like requirements for capital and liquidity to help a firm survive a loss of funding and prevent the need for a government bailout.

The council’s actions have provoked a surge of lobbying by the industry and opened a rift between the SEC and other regulators that appears to be widening.

White has echoed the industry’s points for a while, arguing that unlike banks, money managers don’t accumulate large risky positions on their own balance sheets. She has pointed out that banking regulators constitute a plurality on the oversight council, while arguing the SEC is the expert when it comes to overseeing the markets for stocks and bonds. “We do have that expertise, and it’s something we are constantly putting in play before all the other regulators, some of whom do have that capital markets expertise but for the most part are banking regulators,” White said at an event sponsored by the U.S. Chamber of Commerce in March.

Higher Returns

The disagreement was also evident in reactions to a study issued in October by a research arm of the Treasury Department that concluded that money managers could endanger the financial system when reaching for higher returns. Soon after the report was finished, White released it for public comment, giving the industry a chance to fight back. A top Treasury official, Mary Miller, said on May 19 that the industry overreacted; White said yesterday the industry’s response is justified.

“It is enormously important for FSOC, before it takes any decision, to make certain it has the requisite expertise,” White said. “A lot of it has come and needs to come from the industry.”

White is under pressure from other SEC commissioners, whose votes she needs to advance rules, to protect the SEC’s authority. Commissioner Daniel M. Gallagher said in a letter this month that the council’s efforts are “fatally misguided” and driven by “blatant regulatory creep” as banking regulators seek more control over the firms.