SEC commissioners push back against systemic designation for mutual funds

Two on panel annoyed with regulatory action on 'too big to fail'; Gallagher says asset managers shouldn't be considered systemically key

Apr 3, 2014 @ 1:12 pm

By Mark Schoeff Jr.

mutual funds, sec, securities and exchange commission, too big to fail, sifi, daniel gallagher
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SEC member Daniel Gallagher (Bloomberg News)

Two Securities and Exchange Commission members this week backed the fund industry's stance that asset management companies shouldn't be deemed too big to fail, and they also complained that they are being shut out of deliberations by federal regulators that could lead to tougher regulation on the companies.

At the Mutual Fund Directors Forum conference in Washington on Wednesday, SEC member Luis Aguilar questioned the quality of a study last year by the Office of Financial Research that concluded that big asset management companies should be designated as systemically important financial institutions, or SiFis, which would result in increased capital requirements and bank-like regulation.

The study will serve as the basis for deliberations by the Financial Stability Oversight Council, the body of federal financial regulators created by the Dodd-Frank financial reform law to monitor systemic risk in the markets. SEC Chairman Mary Jo White sits on the FSOC, but none of the other four commissioners does.

“Luis' voice adds a lot of credibility to the things I've been saying for two years,” SEC member Dan Gallagher told reporters Thursday on the sidelines of the same MFDC conference.

“It's a majority of the commission,” he said. “It's not a partisan issue.”

In his meeting with reporters, Mr. Gallagher said that he opposes SiFi designation for mutual funds.

“I don't see how they are systemically important,” Mr. Gallagher said. “Assets owned on an agency basis do not pose the same threats as we saw in the financial crisis.”

In addition, most of the five-member SEC feels shunted aside by the FSOC, Mr. Gallagher said.

Mr. Aguilar, a Democrat, and Mr. Gallagher, a Republican, argue that they have had no input to the FSOC regarding SiFi designations.

“There is real danger in that work being compromised if the full five-member commission is cut out of the process,” Mr. Aguilar said in a speech at the MFDF forum. “The concerns voiced by commenters and lawmakers raise serious questions as to whether OFR's report provides an adequate basis for FSOC to designate asset managers as systemically important under the Dodd-Frank Act and whether OFR is up to the tasks called for by its statutory mandate.”

MFDF president and chief executive Susan Wyderko dismissed the report.

“It contains remarkable misconceptions about the asset management industry,” she told conference attendees.

According to the study, which was released last September, the asset management industry may present vulnerabilities to the financial system because of funds “reaching for yield” through alternative investments, being subject to large redemption requests and using risky leverage through derivatives.

In addition, the failure of a large asset management firm could create instability across the funds it manages or across markets.

“Pooled investment vehicles can potentially create market volatility and more rapid price impacts due to herding behaviors regarding investment in less liquid assets or increased redemptions due to shifting investment as risk tolerances or perceptions change,” according to the report.

The study likely will be at the forefront of a public FSOC forum in May about the asset management industry.

“You all should rightfully worry about the OFR report,” Mr. Gallagher told the MFDF audience on Thursday.

A SiFi label likely would involve increased capital requirements and prudential regulation by the Federal Reserve Board. The FSOC has designated large bank holding companies and some large insurers as SiFis.

Mutual fund companies with assets of more than $100 billion also could be labeled as SiFis, a moniker that doesn't fit, according to one board director.

“I'm concerned for the industry,” said Bruce Crockett, chairman of Invesco Funds in Houston. “The risk of a fund is a whole lot different than the risk of a bank or even an insurance company.”

Investment Company Institute president and chief executive Paul Schott Stevens said in a speech at a conference in Orlando, Fla., that the SiFi label would increase costs for funds and investors.

“It would not take much in added fees, assessments and capital costs to increase quite significantly what these funds would have to charge their shareholders, making them less competitive and less attractive to investors,” he said. “Any SiFi designations clearly will distort the competitive landscape for funds and investors.”

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