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ICI Welcomes New SEC Rules on Funds, Asset Managers

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The mutual fund industry’s trade group said Monday that it welcomed the news that the Securities and Exchange Commission is mulling new rules to assess systemically important risks in mutual funds, hedge funds and asset managers.

“We welcome greater involvement by the Securities and Exchange Commission, as the primary regulator for funds and asset managers, in questions of financial stability,” said Paul Schott Stevens, president and CEO of the Investment Company Institute, in a Monday statement.

“Any risks that may arise in asset management are best addressed by the SEC, which has a highly successful track record of regulating funds and advisors under statutory authority for almost 75 years,” Schott Stevens said. “While we await the details of any proposed rules, we look forward to working with the Commission as it develops targeted rules through an open process with public notice and comment.”

The Financial Stability Oversight Council announced last September that it was studying the activities of asset management firms to better inform its analysis of whether — and how — to consider such firms for enhanced supervision under Section 113 of the Dodd-Frank Act.

Wall Street’s trade group, the Securities Industry and Financial Markets Association, as well as big asset management companies came out against FSOC considering designating asset managers as systemically important financial institutions, called SIFIs.

FSOC said at its July 31 meeting that instead of focusing on asset management companies as possible SIFIs, it would take “a more focused analysis of industry-wide products and activities” to assess potential risks associated with the asset management industry.

FSOC shifting its focus to specific products and activities is “a good opinion,” Scott Burns, global head of manager research at Morningstar, told ThinkAdvisor in a Monday interview. “When you look at the financial crisis and the way the asset managers and the 1940 Act funds performed, [it] worked remarkably.” The Investment Company Act of 1940 “has a tremendous amount of quality architecture to it — in terms of limiting leverage and where assets get custodied and public transparency,” he said. “You can look at how the ‘40 act mutual funds and the companies that provide them performed during the crisis and it was more or less exemplary.”

FSOC’s decision “to step away from deeming these large asset managers as SIFIs and start focusing on individual products has triggered some heightened awareness in the marketplace around what’s going on in these products,” Burn says.

The Wall Street Journal reported Monday that the SEC is considering rules that would require asset managers to provide more data about their mutual-fund portfolio holdings and conduct stress tests on their funds to determine how they would weather economic shocks such as a sudden change in interest rates. The Journal said that mutual funds’ use of derivatives to boost returns is a practice that SEC officials believe also warrants closer scrutiny, and that officials are also discussing ways to limit the hedge-fund-like strategies of alternative mutual funds, including betting on some stocks and against others, trading futures contracts and using derivatives to increase leverage and boost returns.

Morningstar’s Burns told ThinkAdvisor, however, that the SEC asking about funds’ use of derivatives “has been going on for years. That’s an evolving ongoing discussion that the SEC has been having with the industry for some time now.”

“The work that the SEC has been doing around evaluating derivatives and funds and alternative funds is actually focused on disclosure as opposed to banning” the products, Burns says. “The SEC is noticing the increasing complexity in the marketplace and the SEC wants to make sure that the [Investment Company Act of 1940] has kept up with the times, especially in terms of disclosure.”

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