Asset Managers Balk at SIFI Designation

Terry Flanagan

Asset managers and the funds they manage do not pose a systemic risk, according to industry groups.

Sifma’s Asset Management Group and the Investment Adviser Association have called on the Financial Stability Oversight Council to allow the U.S. Securities and Exchange Commission, as the primary regulator of the industry, to complete its own review of asset manager products and activities and consider the cumulative impact of any new rules before taking any action.

“We appreciate FSOC’s effort to better understand the unique characteristics of risk associated with the asset management industry,” said Timothy Cameron, managing director and head of Sifma’s Asset Management Group, and Karen Barr, president & CEO, IAA, in a statement. “It is imperative that policymakers recognize that the business structure of an asset manager and the funds they manage is fundamentally different from a commercial bank, does not present systemic risk, and as such should not be subject to SIFI designation, which would have a significant negative impact on investors and the capital markets.”

In a comment letter sent in response to the FSOC’s request for information regarding whether asset management products and activities may pose potential systemic risks to the U.S. financial system, the industry associations said the SEC, as the primary regulator of the asset management industry, has the responsibility and expertise for assessing where potential new data, regulations or other tools are necessary.

Risks associated with liquidity and redemptions in investment vehicles, such as mutual funds and closed-end funds, do not pose a threat to financial stability, they said. These risks are already effectively mitigated by regulation, fund structures, and other market practices.

Regulatory intervention designed to address hypothetical systemic risk could harm individual investors saving for long-term goals like retirement, increase issuers’ cost of capital, negatively impact the diversity and resiliency of markets, and slow U.S. economic growth as a result.

Products and services offered by asset management firms are structured in ways that minimize the risk of disruptions associated with operational risk, even under conditions of extreme market volatility, according to the letter. Client assets are held at third-party custodians, not with the asset manager.

“Asset managers operate in a highly competitive environment – there are a variety of measures in place, both regulatory (SEC, OCC) and market driven, to control operational risks,” said the letter.

In a speech on Wednesday at the OpRisk Conference North America, CFTC Commissioner Sharon Bowen said: “Operational risk is a critically important part of finance. Ultimately, the future of our industry is an unknown commodity and regulators and investors all have to be ready. And while there will always be black swan events that do come out of nowhere, the more companies take into account as many of their real risks as is possible, the better each individual company and our financial system generally will be able to withstand unforeseen events.”

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