Federal authorities are deeply concerned about the threats to market stability that could arise from lax supervision of fund companies and advisors in areas like liquidity and redemptions, leverage and risk management.
Those concerns received an airing as officials sat down Monday to contemplate a broad set of new regulations that aim to tighten oversight and strengthen the stability of the asset-management sector.
No firm conclusions have been reached yet in the ongoing probe of the fund industry, note officials of the Financial Stability Oversight Council, a consortium of financial regulatory agencies.
But the questions about potential financial stability risks posed by asset-management products and activities will continue, say FSOC leaders, including Treasury Secretary Jacob Lew.
"This is, quite fundamentally, our job," Lew says. "Asking tough questions and probing deeper in certain areas of the financial system does not necessarily mean that there will always be risks that will rise to a sufficient level to warrant action by this body, but not asking questions or bypassing certain sectors of the financial system would be shirking our responsibility and our shared mandate to understand potential risks to financial stability."
Officials say that the FSOC is planning to issue a full update on its review of the potential risks associated with the asset-management industry in the first half of next year.
From its inception dating to the Dodd-Frank Act, the FSOC has been an unusual entity whose voting members are comprised of the heads of federal regulatory agencies with very different areas of oversight, including the SEC, the Fed and the FDIC.
Tasked with shoring up stability in all corners of the financial sector, the FSOC's broad mandate is premised on receiving expert input from the lead regulators in a given market segment that it is evaluating.
So in the area of fund companies and advisors, the council is looking to the SEC, which has initiated its own, independent inquiry into the asset-management sector that figures to inform the FSOC's work in that area.
"We are particularly taking into account the ongoing rulemakings from the SEC," says Lindsay Huot, deputy director of policy at FSOC, who describes the separate efforts underway at the council and commission as "complementary."
Under the SEC's wide-ranging review of the fund industry, the commission has already advanced proposals to introduce new reporting requirements and to mandate that open-end funds -- including mutual and ETFs -- establish a liquidity risk management program.
SEC Chairman Mary Jo White outlined the commission's priorities in strengthening oversight of the asset-management industry last December, including a focus on conflicts of interest and registration and reporting requirements.
At Monday's FSOC meeting, White reiterated the commission's concerns about the fund sector, indicating that more proposals to enhance regulation of the industry will be forthcoming.
"The commission has been very focused on enhancing regulation of risk related to the asset-management industry, particularly those arising from portfolio composition and operations of registered funds and advisors," White says. "These are critical areas for the commission to address as the primary regulator of funds and advisors."
David Grim, director of the SEC's Division of Investment Management, says that staffers are scrambling to develop recommendations by the end of the year that would address how funds use derivatives and "place appropriate limits on funds' leverage obtained through derivatives."
"The staff is hard at work on that, as well as recommendations related to transition planning and stress testing," Grim says.
Separately, at Monday's FSOC meeting, officials called on industry leaders to reassess how their firms are approaching cybersecurity, noting that financial companies are a favorite target of hackers and that the threats are growing in severity and scope.
"Malicious cyber actors are becoming more sophisticated and more determined, and the financial services sector continues to be an attractive target for those seeking economic gain, a platform for making a political point or -- worse yet -- to do harm to the U.S. and global financial system," says Amias Gerety, the Treasury Department's acting assistant secretary for financial institutions.
That warning amplifies the message that the SEC and FINRA have been sending to advisors and brokers, which have been the subject of an ongoing series of targeted exams evaluating how firms are protecting their networks and sensitive client data.
Gerety acknowledges that cybersecurity can be a daunting challenge for smaller firms -- particularly those without dedicated IT staffs -- and that there is no "one-size-fits-all" solution.
Still, he suggests that firms consider a step-by-step framework produced by a division of the Commerce Department that offers practical guidance for designing and implementing a cybersecurity program, touching on technical and organizational issues as well as steps firms can take to mitigate the damage caused by the inevitable breach.
"We must recognize that there is no such thing as absolute security, and while we should do everything that we can to prevent them, incidents will occur," Gerety says.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access