A recently released US Treasury Department Report has resoundingly affirmed a position that for years CFA Institute has advocated for: The asset management industry does not pose the same types of systemic risks found in the banking sector and should not be regulated in the same way.

The report, the third in a series of four such reports mandated by the Trump administration on core principles for regulating the US financial system, focused on asset management and insurance and covers a range of issues, including systemic risk and stress-testing, international competitiveness, and economic growth.

But it is the coverage and recommendations relating to the potential systemic risks of the asset management industry that we find most consistent with those CFA Institute has espoused for several years.

Regulators and Systemic Risk Implications of Asset Management Industry

Since the Office of Financial Regulation (OFR) first issued its report in 2013 suggesting that the asset management industry presented a number of systemic risk implications, CFA Institute has pushed back, noting that among other differences from banks, asset managers do not own the underlying assets. Moreover, we have repeatedly noted few crises, including the Great Recession of 2008–2009, originated in the asset management industry.

We have taken similarly strong positions in formal comment letters throughout the years to consultations issued by the US Financial Stability Oversight Commission (FSOC), the European Financial Stability Board (FSB), and the US SEC , as they embraced systemic risk implications relating to asset management and recommended regulatory actions to address them. While noting that risks are an inherent part of our capital markets, we argued that despite isolated and temporary liquidity concerns, the asset management industry — particularly with respect to non-money market funds — has shown little signs of risk contagion, even during times of market stress. We also have advocated that open-end investment funds do not need additional regulations that require classifying fund assets into “asset buckets” as part of a risk liquidity management system.

Treasury Report Distinguishes Banking From Asset Management

The report supports the positions of CFA Institute on a number of fronts, noting that a key feature of the asset management industry is “the separation of the assets of the investment adviser from the assets being managed.” It also highlights the important legal, structural and operational characteristics of the asset management industry that distinguish it from banks and that negate the need for a number of additional regulations.

In light of these conclusions, the Treasury

• recommends shifting to an activities-based framework (rather than entity-based evaluations) for identifying systemic risks, in recognition of the fundamental differences between the banking, asset management, and insurance industries;
• rejects the call for stress-testing of investment advisers and investment companies (as required under the Dodd-Frank Act);
• rejects the SEC’s regulatory approach that requires “bucketing” of assets as part of liquidity risk management programs, and instead supports a principles-based approach;
• recommends that the SEC withdraw its proposed rule imposing additional business continuity requirements on asset managers, given the principles-based rules that already exist;
• notes that the “runs” that occur during times of financial crises and systemic risk typically do not occur in non-money market firms;
• recognizes the existing leverage, liquidity, diversification, and control requirements with which asset managers must already comply; and
• rejects prudential regulation of the asset management industry as the most effective means of mitigating risks.

A Few Disagreements

At the same time, there were elements of the Treasury report’s comments on the potential systemic aspects of asset management that were in conflict with the positions of CFA Institute. Whereas CFA Institute suggested that the SEC permit — not mandate — asset managers to use swing pricing to manage dilution of existing fund shareholders, Treasury urged further study.

Another area of disagreement relates to the electronic delivery of asset management shareholder reports. CFA Institute would support electronic delivery as long as paper delivery was the default for investors who do not respond to requests to choose electronic delivery. Our position is based on the reduction in proxy voting for funds when electronic delivery was introduced. Treasury, however, supports electronic delivery as the default delivery mechanism.

In the end, though, these are disagreements on technical matters. What is most important about the Treasury report is its consistency in a number of important areas that we have focused attention on over the past years. The asset management industry does indeed distinguish itself from the systemic risk implications inherent in the banking industry, and we support the Treasury’s careful attention to these distinctions. Ensuring transparency, a level playing field, and important investor protections while evaluating the need for certain regulations is a delicate balance. In this case, we believe the Treasury got it right.

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