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Asset Managers Urge Restraint, Change in Course for FSB

Several commenters urged the Financial Stability Board to rethink the approach outlined in its consultative paper proposing revised methodologies for identifying non-bank non-insurer global systemically important financial institutions (NBNI G-SIFIs). The consultative paper outlines size-based initial materiality thresholds for review, one of which would advance for consideration any entity with a net AUM of greater than $100 billion. In its response, Vanguard argues that "[s]ize is an imperfect and easily manipulated metric that should not be used as a proxy for systemic risk." Such an approach is both "overinclusive and underinclusive" and "disproportionately captures U.S. mutual funds and U.S. investment advisers without addressing global systemic risk."

Vanguard’s letter also highlights the strength of the U.S. regulatory system and characteristics of mutual funds that practically eliminate systemic risk: "we are unaware of any financial crisis that has been caused by an entity capitalized with 100% equity, no leverage, transparent holdings, and that is subject to daily pricing and valuation. We do not believe this is simply due to good fortune, but rather, attributable to the strength of the regulations that govern mutual fund activities, the long-term focus of most mutual fund investors, and the broad diversification of mutual fund ownership." 

BlackRock’s data-intensive 70-page letter makes similar arguments. It emphasizes that the relationship of an adviser to a fund is not analogous to that of a bank to its deposits due to the role of custodians and the presence of restrictive regulations. The letter points to the recent heavy outflows in PIMCO's Total Return Strategy fund following the departure of Bill Gross as an example of the "ability to transition large amount of AUM from one manager to another without market disruption." Vanguard’s letter also acknowledges that investors move accounts between investment advisors regularly without issue and that the replacement of an investment adviser due to distress at the adviser has previously occurred without issue.

Both firms suggest that pushing forward with the proposal would be premature, and that the FSB should instead focus on an activities-based approach. Vanguard urged the FSB to focus on gathering data on the asset management industry (pointing to efforts such as the recent reporting proposal from the SEC) instead of moving forward using "broad hypothetical scenarios and academic studies that are not grounded in complete and accurate industry data." BlackRock also suggested that metrics developed to identify companies for designation are premature until the FSB actually identifies systemic risks and policy measures that can be used to address those risks.

Vanguard suggested that, if the FSB decides to continue with individual designation, it should revise the list of exempted entities due to the "arbitrary" nature of the current approach. The consultative paper exempts pension funds because it argues that they tend to be long-term accounts, which thus tend to pose less systemic risk. Vanguard notes that 56% of industry assets are long-term retirement accounts and that an estimated 77% of its own accounts are long-tenured. As a result, the firm argues that the FSB should extend the reasoning for the pension fund exemption to mutual funds.

The Forum's response to the FSB's consultative paper can be found here. Several other industry groups, including the ICI and SIFMA, also submitted comments.