U.S. mutual fund group rejects Treasury report on asset managers

Reuters

By Sarah N. Lynch

WASHINGTON, Nov 1 (Reuters) - A U.S. Treasury researchreport that could pave the way for tougher regulation of assetmanagers lacks empirical evidence to back up its claims andshould be scrapped, the head of the largest U.S. mutual fundtrade group said.

"I'd like to see them take the report off the table,"Investment Company Institute Chief Executive Paul Schott Stevenstold Reuters in an interview on Friday.

Stevens was responding to a Sept. 30 report released by theTreasury Department's Office of Financial Research, whichdetermined that the activities of certain large asset managerscould pose risks to the broader marketplace.

The study concluded that risks are posed by the activitiesof large firms, including the use of leverage to help boostreturns and "herding" behavior in which managers crowd intosimilar or the same assets. Any financial shocks could thentrigger investors to rush for the exits, the report found.

Its findings are expected to be used by regulators on theFinancial Stability Oversight Council (FSOC) to determinewhether they should designate certain large asset managers as"systemically important financial institutions" or SIFIs - a tagthat brings tough capital requirements and heavy supervision bythe Federal Reserve.

Certain large banks were automatically designated assystemically important, and the council has since alsodesignated large clearinghouses and insurance companies.

Many people expect asset managers will be the next sector tobe considered for possible designation.

The Securities and Exchange Commission, whose ChairwomanMary Jo White is a voting member of the FSOC, put the report outfor public comment after its release.

The comments were due on Friday, and asset managers fromFidelity to Vanguard as well as the ICI are expected to submitletters highly critical of the report.

As of the close of business on Friday, more letterscriticizing the report started to pour in, including commentsfrom BlackRock, T. Rowe Price, two leading trade groups for fundmanagers, and AllianceBernstein among others.

"Our view is that the OFR study creates confusion," BlackRock's Vice Chairman Barbara Novick told Reuters. "It mixesthe risks that are associated with, let's say an investmentproduct or investment practice versus what might be the risksassociated with an asset management firm."

BlackRock, the world's largest money manager, is among thelargest asset management firms opposed to a SIFI designation.Novick said the report's focus on larger asset management firmsas a bigger risk than smaller firms is wrong.

"A smaller, more concentrated firm is actually a biggerrisk," Novick said, citing a larger firm's ability to diversifyportfolios and strategies.

People familiar with matter previously told Reuters that theSEC decided to seek comments on the study in part because it,too, had concerns about the report's portrayal of the industry.

"Our bottom line is that the report does not provide anypredicate whatsoever for the FSOC to be acting to designatefirms in the asset management business as SIFIS," Stevens said.

The Office of Financial Research is an arm of the TreasuryDepartment that was created by the 2010 Dodd-Frank Wall Streetreform law to help conduct research that will lay the groundworkfor the council's regulatory policy decision-making.

The asset management report is the first study to bereleased since OFR's creation.

Stevens said history fails to support the study's findings.

"It doesn't produce any empirical evidence to support thatscenario," he said. "In fact, all of our research...suggeststhat that kind of phenomenon has never happened."

He also said the report is flawed because it fails toinclude research on private funds such as hedge funds, eventhough the leading historical example of an asset managersending shockwaves through the market was the 1998 collapse ofthe highly leveraged hedge fund Long-Term Capital Management.

"Long-Term Capital Management is mentioned nowhere in thisreport," he said.

Stevens said he thinks the process for how the councildesignates firms as systemically important is shrouded insecrecy and should be more transparent.

His request for the report to be withdrawn is part of agrowing chorus of voices that emerged this week, as firms, tradegroups and lawyers all wrote letters to the SEC making similarrequests.

Among others who asked for the report to be withdrawn werethe head of the U.S. Chamber of Commerce's Center for CapitalMarket Competitiveness, Dechert LLP Partner Thomas P. Vartanianand two other asset manager trade groups.

"The study should not be relied on to inform policydiscussions about the asset management industry," wrote theInvestment Adviser Association and the asset management group ofthe Securities Industry and Financial Markets Association.

"The flaws and inaccuracies in the study reflect anincomplete research process and a failure by OFR to engagesubject matter experts in its research and analysis."

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