WASHINGTON - Whether regulators will designate mutual funds as "systemically important financial institutions," or SIFIs, was a point of focus at the ICI's General Membership Meeting. While this move would be absolutely preposterous, it is unfortunately not outside of the realm of possibility. My hope is that regulators will heed the advice of last week's keynote speaker, former British Prime Minister Tony Blair, and "regulate in partnership with the sector." If regulators do engage with the industry, they will quickly discover that mutual fund companies are not like banks and other SIFIs.
As ICI President Paul Stevens noted, mutual funds are already transparent vehicles with clear regulation that feature several key distinctions from SIFIs:
1) Mutual fund managers invest for their funds, as agents, and each fund stands on its own - a legal entity separate from its manager and from the manager's other funds
2) Mutual funds have been tested by real-world crises for nearly 75 years without facing the destabilizing "runs" that regulators imagine
3) Mutual funds do not borrow significant amounts to make their investments (limited use of leverage)
4) Mutual funds do not fail in the same way as banks (there are no guarantees)
Given these considerations, it would be ludicrous to designate funds as SIFIs. It also seems short-sighted and poorly thought through. To quote another line from Tony Blair, "the risk with regulation is that you regulate for the previous problem." I am extremely concerned that knee-jerk regulation will lead to unintended consequences. SIFI designation for a few large fund companies would increase the costs of doing business for those organizations. This would lead to one of two likely results:
1) Increased costs of complying with regulation are passed along to investors, who are then likely to flee to another fund company - that new firm would then likely be designated as a SIFI, creating a downward spiral that raises costs for all investors
OR
2) The fund company swallows the additional costs of complying with regulation, thereby weakening the stability of the firm and working counter to the intent of the regulation
By designating mutual funds as SIFIs, the Financial Stability Oversight Council would damage a critical tool that is used by over 90 million households to save for retirement, and would lead to numerous unintended consequences without accomplishing its intention. I hope that the FSOC will take the time to work closely with the industry to understand these important distinctions. Regulated funds and their managers do not pose risks to the financial system at large and therefore designation of funds or asset managers as SIFIs is unnecessary.
Lee Kowarski is co-founder of kasina, a strategy consulting firm that innovates distribution, marketing and products in the financial services industry. kasina works with a wide variety of clients from five continents, including firms representing 90% of the U.S.'s total assets under management.
