Big fund managers go into battle over tougher US capital rules

October 10, 2013 2:19 pm

Big fund managers go into battle over tougher US capital rules

By Stephen Foley in New York and Gina Chon in Washington

The world’s largest fund managers are preparing a lobbying push to forestall tougher capital rules in the US and greater oversight of their activities, which have been mooted in the name of financial market stability. The industry has reacted angrily to a report last week that suggested companies with trillions of dollars under management might be considered “systemically important”.Companies plan to lodge objections to what they say are factual errors in the report by the US Office of Financial Research, and some are considering trying to get Congress involved or seeking to exploit an apparent turf war between regulators.

Meanwhile, the industry’s lobby group on Thursday lashed out at the OFR report, calling it “a litany of nightmare closet ‘could happens’” that was “unable to divorce speculation from reality”.

In remarks to the organisation’s capital markets conference in New York, the general counsel of the Investment Company Institute, Karrie McMillan, urged members to rally against the report and its conclusions.

“We care about this report because we’ve learned the hard way that vague insinuations and incorrect data can lead to bad public policy,” she said. “And we’ve learned that it’s very easy for scary-sounding catchphrases to become part of our regulatory lexicon.”

The research office said asset managers could create vulnerabilities in the financial system if they increased leverage, bought similar assets at the same time because of competitive pressures, or engaged in fire sales in the event of mass redemptions by clients.

“ICI research, which has been carried back as far as 1945, consistently shows that long-term fund investors react in a measured fashion to even the most severe stock and bond market downturns,” Ms McMillan said. “Shareholder actions have solidly demonstrated that the behaviour posited by the OFR simply is an academic fantasy.”

The OFR report was written for the Financial Stability Oversight Council, which is charged with deciding which non-bank firms are ‘systemically important financial institutions’. These Sifis can be asked to hold extra capital or liquidity, or to take other actions to prevent or to minimise the impact of their failure.

We care about this report because we’ve learned the hard way that vague insinuations and incorrect data can lead to bad public policy. And we’ve learned that it’s very easy for scary-sounding catchphrases to become part of our regulatory lexicon

– Karrie McMillan

The report did not focus on specific companies, but it did mention the largest asset managers, including BlackRock, Vanguard Group and Fidelity Investments. BlackRock has $3.9tn of assets under management.

The FSOC’s examination of asset managers potentially pits two regulators of the council against each other. TheSecurities and Exchange Commission regulates asset managers, but if certain companies receive a Sifi designation, oversight would move to the Federal Reserve. The SEC is prepared to fight to maintain jurisdiction over asset managers and has the ability to assess them for systemic risk, people familiar with the matter said.

Executives at one of the largest asset managers said they expected a more sympathetic hearing from the SEC, which said last week it would accept comment on the OFR report and post the views on its website.

It is unusual for the SEC to ask for the public’s views on a report that did not originate from the agency.

“We think the SEC will assert itself as the experts here,” said one executive.

There is also potential for lawmakers to get involved. In June 2012, a bipartisan group of House lawmakers, most of whom were on the House Financial Services Committee, wrote a letter to then Treasury Secretary Tim Geithner urging the FSOC to be cautious in the way it studies the asset management industry and for the council to seek public comment and input from industry experts.