SEC Fights Turf War Over Asset Managers

SEC Fights Turf War Over Asset Managers


Updated Jan. 28, 2014 8:04 p.m. ET


WASHINGTON—Senior U.S. officials are clashing over whether the asset-management industry poses risks to the financial system, setting up a fight over whether the industry should face tougher oversight.Officials at the Securities and Exchange Commission, which currently regulates asset managers, have pushed back against a powerful yet little-known Treasury Department office that is laying the groundwork for Federal Reserve oversight of companies like Fidelity Investments and BlackRock

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The regulatory battle, described by people familiar with the situation, could complicate Washington’s efforts to rein in nonbank financial companies that regulators believe pose risks to the broader financial system.

The SEC sits on a council of top regulators that must determine whether financial firms like asset managers are “systemically important” and should be drawn in for Fed oversight.

SEC officials have raised concerns that a September report by the Office of Financial Research overstated potential risks posed by asset managers by suggesting their vulnerability to the types of banklike stresses that toppled Bear Stearns Cos. and Lehman Brothers Holding Co.

The report found the $53 trillion asset-management industry is “highly concentrated” and “vulnerable to shocks” that could pose risks to the broad financial system. It also warned of data gaps for some of its activities.

The SEC attempted to tone down the report as it was being written, according to people familiar with the drafting process, and has since raised concerns that the final version ignored requested changes.

SEC officials say the report understates the extent to which the industry already is regulated and doesn’t give enough credence to the fact that investment losses are borne by shareholders in funds operated by the asset managers, rather than by the companies themselves.

Daniel Gallagher, an SEC commissioner, in a speech earlier this month, called the report “notorious” and said “the Fed has taken steps to extend its regulatory paradigm.” SEC commissioner Michael Piwowar also criticized the report in a speech Monday.

The SEC’s concerns mirror those of the industry, which contends that while firms might engage in some risky activities, they essentially manage other people’s money and don’t pose risks to the broader system. The industry is pressing its case with lawmakers and regulators to avoid a stricter capital regime, which would potentially limit companies’ ability to take on leverage or reward shareholders.

“While the OFR report acknowledges asset managers act as agents on behalf of clients, what appears to be less understood is that ‘assets under management’ represent investments owned by clients, not the firm,” said Tara McDonnell, a spokeswoman for BlackRock. “So at the firm level, asset managers pose no systemic risk.”

The report was requested by the Financial Stability Oversight Council, which is required under the 2010 Dodd-Frank law to consider whether any nonbank financial companies are so large or interconnected that their collapse could ripple through the financial system.

The council, which includes the SEC chairman, Treasury secretary and other top regulators, relies on the Office of Financial Research to help inform its decision making on which companies to designate as systemic.

Lawmakers are expected to quiz Richard Berner, who heads the office, about the report at a Senate Banking Committee hearing Wednesday. Several senators already have written letters to Treasury Secretary Jacob Lew criticizing the report.

“Many questions have been raised as to the integrity of the OFR study as well as the lack of transparency surrounding its development,” Sen. Mike Crapo (R., Idaho), wrote in a letter to Mr. Lew on Monday.

Treasury officials dispute that they didn’t collaborate with other agencies or the industry, saying they went out of their way to seek input from the SEC and others that they then incorporated into the report. They also stress the review of asset managers is in its early stages.

“We worked hand in glove with the SEC on producing this report,” Mr. Berner said last month at a panel hosted by the Brookings Institution. “Their fingerprints are on the report.”

The report itself took over a year to produce and wound up being heavily edited, according to people familiar with the matter.

SEC staff successfully removed one reference to money-market mutual funds, which fall under the agency’s purview, according to people familiar with the report.

The final report was cut down to 34 pages from at least 80 and didn’t focus on specific risks posed by money funds. It also excluded a summary of academic literature on the asset-management industry that had previously been included.

Shortly after the Treasury released the report, the SEC published it on the agency’s website and sought public comment—giving industry groups and others a forum to criticize the document. Treasury officials were taken aback by the move, according to several people familiar with the matter. It is unusual for the SEC to seek comment on a report it hasn’t produced and that doesn’t include agency policy recommendations. SEC officials acknowledge the situation is unique—an outside regulatory body has never previously commissioned a study on an industry overseen by the agency. SEC official say they sought comment to collect industry reaction in a central location.

About bambooinnovator
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 (, 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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