WASHINGTON — Pushback by the Securities and Exchange Commission is complicating a regulatory effort to investigate whether large asset managers should be labeled "systemically risky."

Chairman Mary Jo White and other top SEC officials have voiced skepticism of the idea, joining lawmakers from both political parties who suggest it is unnecessary. Their intervention has significantly bolstered efforts by the financial services industry to slow down the process by the Financial Stability Oversight Council to examine the issue.

"Everyone is throwing money at it," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick. "It's a big issue for banks. It's a big issue for asset managers."

SEC officials' involvement raises a critical question: How influential can a primary regulator be when it comes to designating firms it regulates as a systemically important financial institution? Although FSOC has already designated three insurance companies as SIFIs, there was no federal insurance regulator to weigh in on the matter.

The consideration of asset managers like BlackRock, Fidelity and Vanguard, which are overseen by the SEC, is the first test of the issue and may make it more difficult for the FSOC to act.

"One of the most forceful defenses is the adequacy of regulation already in place. And the most important advocate of that point is the regulator," said Thomas Vartanian, a banking attorney at Dechert LLP.

At issue is whether the $3.9 trillion asset management industry poses a threat to the economy and requires supervision by the Federal Reserve Board, which oversees any company labeled as systemically risky.

The asset management and banking industries have argued that unlike banks, money managers don't accumulate large risky positions on their own balance sheets. They say a far better approach would be to focus on regulating specific activities as opposed to designating a small group of large asset managers or hedge funds.

"The concern with a bank is that it has a run and everybody takes their money and liquidates their assets," said Oliver Ireland, a partner at Morrison & Foerster and former associate general counsel at the Fed. "By designating an asset management firm you could be precipitating a run. Even if it's an orderly withdrawal, the firm is going to shrink. It's not going to be a SIFI anymore. If you have a problem with an asset management firm, it seems it would be an activity problem, not an individual firm."

Lawmakers in the Senate have been sympathetic to those concerns, holding hearings questioning a report by the Office of Financial Research that suggested asset managers posed an economic threat. They also recently passed a bill that would change the Dodd-Frank Act to ensure that capital standards by banks would not apply to nonbank financial institutions named as SIFIs. (The House has not yet acted on the bill.)

But the SEC has also joined the fray. Speaking at an Investment Company Institute conference in late May, White came to the defense of asset managers.

"I don't think you are overreacting to the process," White said at the conference. "The issues are enormously important, I mean, on every side, so getting the maximum input from all constituencies" is important.

White's comments followed remarks by Mary Miller, the Treasury undersecretary for domestic finance, who days earlier said she had been a "little bit surprised" by the industry's "overreaction" to public statements made so far.

White and other SEC officials have bristled at the idea that the SEC shouldn't have primary oversight of asset managers, hinting that the Fed is the wrong supervisor for such firms.

In her speech, White argued that the SEC is the expert when it comes to overseeing the markets for stocks and bonds. The agency has also already begun drafting a plan to increase its oversight of asset managers.

"We do have the expertise, and it's something we are constantly putting in play before all the other regulators, some of whom do have the capital market expertise, but for the most part are banking regulators," said White. "It is enormously important for the FSOC, before it takes any decision to make certain it has the requisite expertise. A lot of has come and needs to come from the industry."

Other SEC commissioners, meanwhile, have expressed disappointment that they are effectively shut out of deliberations by the council. Under Dodd-Frank, the SEC's chairman has a vote on the FSOC, but the other commissioners do not.

Luis Aguilar, a Democrat, and Dan Gallagher, a Republican, have argued that they have had no input into the SIFI designation process.

"There is a real danger in that work being compromised if the full five-member commission is cut out of the process," Aguilar said during a speech in April.

To be sure, the FSOC could vote to overrule the SEC's objection. Under the financial reform law, designation of any nonbank financial firm requires a two-thirds majority vote by the council along with the approval of the Treasury secretary.

But any objection of the SEC's White, widely regarded as a credible and tough regulator, could make that vote harder unless the council amasses more evidence that asset managers pose a systemic threat.

"If it's going to be credible carrying out of its function than it needs to build a stronger case," said Ireland. "I think they would be better served to take a more methodical approach."

The council also has a number of options at its disposable aside from a systemic designation. FSOC representatives have pointed to other alternative approaches such as making recommendations in its annual report as well as utilizing its authority to urge action on the part of SEC. It could also stand aside entirely.

It is unclear which path the FSOC will take, but Treasury officials have already signaled a need to take a more cautious and thoughtful approach to the issue while sending the clear message that no conclusions have been drawn.

"There's no judgment that has been made," Miller said at a May 19 conference. "There's no outcome that's been predetermined. So we're not driving to any particular conclusion. We're trying to understand what risks there are to the market."

Some observers suggested that delay could persist for some time, noting the amount of lobbying being brought to bear.

"From that standpoint, you wouldn't expect quick action. I think you'll see more of the same," Weissman said.

Donna Borak is the Federal Reserve reporter for American Banker.

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