WASHINGTON -- Facing the specter of a new and more intrusive regulatory environment, the asset management industry needs to present a unified front and better educate regulators about how the sector really operates in an effort to stave off bank-like oversight, top fund executives are urging.
"As an industry, we must embrace our role as stewards, and work with regulators to protect the interests of investors," Vanguard Chairman and CEO Bill McNabb said at the Investment Company Institute's recent general membership meeting. "But if we become complacent, if we fail to act in the interest of our investors, if we become divided an as an industry, then our regulatory framework could change significantly, and investors could suffer."
McNabb and others in the fund industry warn about what they see as a misguided initiative on the part of U.S. and global regulators that could result in large asset managers being designated as so-called systemically important financial institutions, or SIFIs, which would entail stricter regulation and a new set of compliance requirements.
"This could mean a lot of different things, none of them particularly appealing," McNabb says.
In particular, he warns that the capital requirements associated with a SIFI designation would be covered by fees paid by investors, who could also be on the hook if another designated company were to fail, revisiting the bailout cycle of the recent financial crisis.
"In a sense, it would be just another form of a tax on Main Street," McNabb says.
In the United States, the consideration of SIFI designees comes from the Financial Stability Oversight Council, or FSOC, an interagency consortium of federal financial regulators organized under the Treasury Department and established by the Dodd-Frank Act.
The FSOC has been reviewing the role that various non-bank entities play in the financial sector, seeking to identify the companies whose "material financial distress -- or the nature, scope, size, scale, concentration, interconnectedness or mix of its activities -- could pose a threat to U.S. financial stability."
Designees are subject to the oversight of the Federal Reserve and prudential regulatory standards such as capital and liquidity requirements.
To date, the FSOC has designated AIG, General Electric Capital, MetLife and Prudential Financial as systemically important non-bank institutions.
In the international arena, the Financial Stability Board, a coordinating council of national regulators and global standards bodies, has been exploring the implications of designating companies outside of banks and insurance providers as systemically important.
Barbara Novick, vice chairman of BlackRock, argues that the push to expand regulation comes in part from a misunderstanding of the nature of the asset-management industry. Novick credits the FSOC for recently issuing a call for public comment to learn more about the operations of the asset-management companies it is analyzing, but says that too often the impulse for tighter regulations is not supported by the facts.
"We've also heard a lot of hypotheses, and I think the hypotheses all need to be tested, the questions need to be really analyzed, the data needs to be there," she says. Too often, she maintains, advocates of tighter industry oversight are taken in when a "hypothesis on its surface sounds interesting, sounds good, but when you test it, well, it doesn't really hold up. So this learning about asset management has to be the first step to any solution, any regulatory process."
For instance, Novick takes issue with the notion that larger asset-management firms pose a greater systemic risk to the financial system because of a supposed centralized decision-making structure within the firm that concentrates clients' holdings in particular assets.
BlackRock's own analysis reached a different conclusion.
"Our conclusion was the inverse is true," Novick says. "The larger the firm, in most cases, the more likely they have a very diverse business base -- diverse by product, diverse by asset classes, diverse by client types, sometimes diverse by geography as well. So the chance of a large manager actually making one giant decision for all of the assets under management is actually quite unlikely. And in fact that hypothesis would apply more to a specialty firm or a small firm where there might be a house view."
Likewise, Novick dismisses the contention that asset-management firms are susceptible to destabilizing runs if they suffer a major disruption, such as a reputational hit or the departure of a principal manager in the firm.
She spoke elliptically of a "large West Coast manager" who left his firm -- presumably a veiled reference to Bill Gross departing PIMCO and moving to Janus last year.
In Novick's reading, the fallout from that move was limited. Far from demonstrating the "platform contagion" that would see a mass exodus of clients pulling their money from the markets, she says that the substantial majority of outflows were from accounts associated directly with the asset manager, and that most of those funds remained in the fixed-income class, even if they moved from one platform to another.
"It just highlighted the substitutability, the amount of competition," she says.
"We also saw that it wasn't a one-day phenomenon. This is a story that plays out over days, weeks, sometimes months as different clients have different governance processes, they make decisions over different time frames," Novick adds. "It is a planning process, and it's really quite orderly."
Novick argues for what she calls a "product and activities approach," where regulators would develop a more nuanced understanding of the industry, and peg the systemic designation -- or any other type of enhanced oversight -- to the true risks to the stability of the overall system.
"[It] doesn't matter if you're an in-house manager or you're an external manager, doesn't matter if you're a manager owned by a bank or an insurance company or you're an independent, doesn't matter if you focus mostly on mutual funds or on separate accounts," she says. "Regardless of the structure, looking at the products and activities and regulating those is really the only way to reduce systemic risk if there are risks that need to be addressed."
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