PALM DESERT, Calif. -- Back in 2007, no one talked about systemic risk. Now, the term “systemic risk” is on everyone’s minds. But defining it has not come out of the constant attention paid to it now.

Indeed, said Rachel H. Graham, senior associate council of the Investment Company Institute, the term “systemic risk” is not to be found in the Dodd-Frank Wall Street Reform Act. Graham’s comment came in the midst of a discussion of “New Rules, New Regulators: How The Dodd-Frank Act Will Impact The Fund Industry” at ICI’s 2011 Mutual Fund and Investment Management Conference.

That’s not quite the case. A search of the act actually brings up “systemic risk” 36 times. But, in its definition of its purpose, the act does not use the term to define itself.

Instead, the act is designed and enacted “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ``too big to fail,’' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

The sidestepping of what systemic risk constitutes is making it hard to know what fund companies and asset managers are supposed to do about the bill, which is not directed immediately at them, members of the ICI panel said.

All bank holding companies with more than $50 billion in assets are designated under the act as SIFIs, or “systemically important financial companies.” But what about, for instance, mutual fund companies with $50 billion under management?

“Certain large mutual fund firms could be designated as SIFIs,’’ said Paul G. Cellupica, chief counsel at 

Not likely, but possible, given how definitions tend to stretch over time. And until the Financial Stability Oversight Council mandated by the act really gets going, the scope of that oversight will remain unclear.

“The first question we would ask the FSCOC to ask is what is that threat they are trying to mitigate or eliminate?” said Scott C. Goebel
Senior Vice President and General Counsel
Fidelity Management and Research Company. “What is systemic risk?’’

“Absent of some clear sense of what that is, it’s very difficult to tell if this rule is a good rule or a bad rule,’’ Goebel said, broadly, of strictures that will emerge from implementing the act.

The kinds of “enhanced financial standards” and capital requirements being put in place may not apply. In the context of mutual funds, “ that is a regulatory structure that does not really translate into how mutual funds operate,’’ he said.

In any case, life is likely to change, no matter what, for mutual fund and other investment companies of similar ilk.

That’s because SIFIs will not be regulated by the Securities and Exchange Commission. They fall under the scrutiny of the Federal Reserve Board.

And market participants don’t know yet what kinds of scrutiny will be applied, said Satish M. Kini, partner
at Debevoise & Plimpton, a business law firm.

The Fed is very inquisitive regulator, very hands-on, he said. When it starts looking at a firm, it lives at the firm. It’s trying to exercise prudence, so it reduces systemic risk instead of increasing it.

“The SEC is like the cops,’’ Kini said. “The Fed is like your parents.’’


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