Groundwork Laid for Stricter Regulation of Asset Managers; U.S. Study Concludes Firms Would be Vulnerable in a Financial Panic

October 1, 2013 Leave a comment

September 30, 2013, 6:01 p.m. ET

Groundwork Laid for Stricter Regulation of Asset Managers

U.S. Study Concludes Firms Would be Vulnerable in a Financial Panic

RYAN TRACY

Asset-management firms such as mutual funds are vulnerable to a financial panic, the Treasury Department said Monday, releasing a study that could lay the groundwork for stricter regulation of such financial players. The finding that the asset-management industry is “vulnerable to shocks” leaves U.S. regulators with a decision about whether to subject large players such as BlackRockInc. BLK -0.12% and Fidelity Investments Inc. to increased oversight.In an effort to spot risks that could lead to another financial crisis, regulators on the Financial Stability Oversight Council have already brought several nonbank financial companies, including American International Group, AIG -1.06% Inc. and the GE Capital Unit of General Electric Co., under federal oversight by designating them as “systemically important.” Banks with $50 billion or more in assets are automatically considered systemically important.

But the council’s approach to asset managers has been less clear, in part because the industry is different from banking or insurance. Monday’s report was requested by the council as a basis for judging whether asset managers should face the similar rules on capital requirements and other matters.

The report from staff at the Treasury Department’s Office of Financial Research said asset managers “differ in important ways” from big banks and insurers, pointing out that the money under management is owned by the firms’ clients, who would take losses in a downturn.

Still, the report said the industry is “highly concentrated” and includes nine U.S.-based firms that each have more than $1 trillion under management globally. Even if those firms weren’t themselves a catalyst of financial distress, they play a role in so many financial markets that they “could contribute to the transmission or amplification of risks from one market sector to another” in a crisis, the report said.

“Risk-management practices and structures vary significantly among” asset managers, the report added.

Representatives of BlackRock and Fidelity had no immediate comment.

A spokesman for the Investment Company Institute, which represents asset managers, praised the study for recognizing “key distinctions between asset-management companies and banks and other nonbank financial firms,” but added that designating the firms as systemically important “is not an appropriate regulatory tool for addressing risks, if any, that registered funds or their advisers might raise regarding financial stability.”

Monday’s report doesn’t make any recommendations for the council, which is led by the Treasury secretary and includes the chairman of the Federal Reserve and other top officials.

A spokeswoman for the Treasury Department said the council “will review the study closely as it considers potential next steps relating to asset-management activities and firms.”

The council had asked for the study last year. It now needs to decide whether it will consider asset-management firms for stricter regulation and, if so, whether it needs to adopt new criteria for judging the risk that each individual firm poses to the financial system as a whole. That process could take months.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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