Buy Side Assails U.S. Report on Risk

Terry Flanagan

The asset management industry is taking issue with a report by the U.S. Department of the Treasury’s Office of Financial Research (OFR) that purports to show how activities in the asset management industry might create, amplify, or transmit stress through the financial system.

The report, Asset Management and Financial Stability, identifies industry activities that could pose risks to the financial stability of the United States. The OFR studied the activities of asset management firms and funds at the request of the Council, in connection with the Council’s review of nonbank financial companies.

The report notes that significant gaps in data about the asset management industry limit the ability to evaluate potential threats and their implications for financial stability.

SIFMA’s Asset Management Group (AMG) and the Investment Adviser Association (IAA), in comments submitted to the Securities and Exchange Commission (SEC) regarding the report, said that it suffers from flaws and inaccuracies “which reflect an incomplete research process and a failure by OFR to engage subject matter experts in its research and analysis,” according to Tim Cameron, managing director of Sifma AMG.

Sifma and the IAA strongly recommend that the report be withdrawn by OFR. The groups believe that OFR should evaluate all available data before making any recommendations or requesting any further data from industry participants. In particular, they believe that 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.

Factors that make the industry vulnerable to financial shocks, according to the reports, include “reaching for yield” and herding behaviors; redemption risk in collective investment vehicles; leverage, which can amplify asset price movements and increase the potential for fire sales; and firms as sources of risk.

An express mandate of the FSOC is to remove expectations that any financial institution is “too big to fail” and will receive the benefit of government support.

“There is no such expectation in the marketplace with respect to asset management firms, because the resolution of an asset management firm would not require government support,” said Barbara Novick, vice chairman of BlackRock, in a comment letter. “Indeed, asset management firms do not “fail” in this sense, because they have no balance sheet activities to support. Portfolio gains and losses accrue to investors, who may take their assets elsewhere with little market disruption. No additional prudential regulation is necessary to eliminate a “too big to fail” expectation with respect to asset managers, because the expectation simply does not exist.”


Barbara Novick, BlackRock

Barbara Novick, BlackRock

Asset managers act as agents for their clients, investing in accordance with client guidelines, Novick said. Clients regularly replace asset managers that do not perform, and asset managers occasionally go out of business, particularly when they manage one asset class or strategy. However, this creates no systemic impact because the assets are held by custodians on behalf of clients, not by the asset manager itself, and transitioning management of accounts between asset managers is common and straightforward.

“We do not believe there are any major issues with current regulation at the investment manager or mutual fund level in this regard,” said Peter Kraus, chairman and CEO of AllianceBernstein. “Rather, we believe that the imposition of restrictions which are poorly thought out and therefore inappropriate will have negative knock on effects for both investment managers and mutual funds.”

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