Will Asset Managers be the New SIFIs?

A recent report issued by the U. S. Office of Financial Research (OFR) raises new questions about whether asset managers are in line to be designated next as significantly important financial institutions (known as SIFIs) by the Financial Stability Oversight Council (FSOC), bringing with it a host of new requirements as part of the prudential SIFI oversight regime. Established by the Dodd-Frank Act, the OFR is charged with improving the quality of financial data available to policy makers and facilitating analysis of the financial system.

Responding to FSOC’s request for data and analysis that would help inform FSOC on whether to consider asset managers for the SIFI designation, the OFR report tackles a number of areas relating to firm activities and comes up finding potential risks to financial stability in everything from reaching for yield and herding behaviors to redemption risk and leverage that could lead to “fire sales.” In an unusual move, the Securities and Exchange Commission sought public input on the report.

Not surprisingly, there has been considerable pushback, with some commentators noting “unsupported conclusions and overly broad assertions,” “an inaccurate and incomplete picture of the asset management market and the risks it poses to the financial system,” and that it has “significant and substantive factual, analytical, and methodological defects.” Even Dodd- Frank Act author and former Congressman Barney Frank has said that the Act was not intended to extend to this industry and that he does not favor designating large asset managers as systemically risky.

In recent comments to the SEC, CFA Institute noted its support of OFR to objectively conduct research on issues related to financial stability. But recognizing that regulatory measures to address systemic risk should be grounded in solid empirical data and analysis, the letter questioned whether the lack of readily available data undermined certain aspects of the OFR report that suggested correlations between asset manager activities and risk. Moreover, existing federal regulations under which many asset managers fall already restrict a number of activities that the report suggests would amplify risk. Managers of certain accounts also lack the latitude to make unilateral investment decisions that would result in some types of behavior that the report suggests would lead to systemic risk. Thus, the letter urged additional research and analysis before reaching conclusions about whether prudential regulation is needed for this industry.

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Photo credit: iStockphoto.com/Miesna