U.S. mutual fund companies are pushing back against claims that some firms may be too big to fail, saying that subjecting a few large money managers to more regulation would hurt competition and ultimately fund investors.
“New costs and new regulations applied selectively will distort the competitive landscape of our industry,” Paul Schott Stevens, president of the Investment Company Institute, the fund industry’s trade group, said in a speech today in Orlando, Florida. “The consequences of SIFI designation could significantly impair fund investing.”
ICI members including BlackRock Inc. (BLK:US), Pacific Investment Management Co. and Fidelity Investments have lobbyied regulators and lawmakers to avoid being labeled by U.S. and international regulatory bodies as systemically important financial institutions, or SIFIs. The designation could lead to tighter capital, leverage and liquidity rules like those faced by banks.
The U.S. Financial Stability Oversight Council, which includes the heads of the Federal Reserve and the Securities and Exchange Commission, is studying whether New York-based BlackRock and Boston’s Fidelity should receive the label. FSOC officials haven’t explained publicly how or when decisions about asset managers will be made.
The Financial Stability Board, which brings together regulators and central bankers from the Group of 20 nations, said in January that individual funds managing more than $100 billion may be labeled too big to fail. The board didn’t say what actions should be taken after such a designation.
Eleven U.S.-registered mutual funds, led by the $277 billion Vanguard Total Stock Market Index Fund (VTSMX:US), and one exchange-traded fund hold more than $100 billion in assets each, according to data compiled by Bloomberg.
If companies or funds are designated systemically important, Stevens said, bank-like regulations could result in additional costs for investors.
“It would not take much in added fees, assessments and capital costs to increase significantly what these funds would have to charge their shareholders, making them less competitive and less attractive to investors,” he said.
Stevens, 61, argued that designation is unnecessary for retail funds because they rarely use leverage and are already tightly regulated. Fund companies also don’t put their own money at risk and don’t need capital to absorb investment losses, he said.
“Unlike banks and insurers, asset managers are agents, not principals,” Stevens said.
FSOC was established under the 2010 Dodd-Frank Act, in part on the premise it would be pointless to tighten rules for banks if other big financial players could take risks without enough oversight. The panel is headed by Treasury Secretary Jacob J. Lew and includes Mary Jo White, chairman of the SEC, the primary regulator of the funds industry.
White said last month that the SEC is considering how to boost oversight of the risks posed by large asset managers. The initiative may include an effort to require that mutual funds report their holdings to the SEC on a monthly, rather than quarterly, basis.
“That would be a very significant step forward,” Stevens said in an interview after his speech. “We certainly think the SEC ought to have the resources to conduct ongoing monitoring and empirical analysis of that data as it comes in.”
The ICI’s lobbying has caused some regulators to reconsider the findings of a study published in September by the Treasury Department’s research office, Stevens said. The Office of Financial Research’s report said the activities of large asset managers could pose a risk to the stability of the financial system.
“There is a sense now that if regulators are going to designate based on analysis out of OFR, that analysis has to be far more reliable,” Stevens said.
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