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Commenters Critical of OFR Study on Asset Management Industry

As we first told you about last month, the SEC requested that the public comment on a report (“Report”) published by the Office of Financial Research in the Treasury Department (“OFR”) analyzing “how asset management firms and the activities in which they engage can introduce vulnerabilities that can pose, amplify, or transmit threats to financial stability.”  The comment period closed on November 1.

Commenters were critical of the OFR’s Report, with many emphasizing similar issues.  Comments centered on the following themes:

  • A flawed process in researching the study, including lack of input from industry participants.  In its comment letter, the ICI described the Report as “replete with sweeping conclusions unsupported by data; lacks clarity, precision, and consistency in its scope and focus; and misuses or misinterprets data.”
  • A lack of empirical data to back up its assertions about the potential threats posed by the asset management industry.  As the Center for Capital Markets Competitiveness stated in its comment letter, “The Report fails to provide empirical evidence or economic data to support (i) the likelihood of the purported triggering events occurring, (ii) the likelihood that such events would have a material impact on the industry if they occurred, or (iii) the likelihood that financial reactions within an industry would translate into a meaningful impact on systemic financial stability.”
  • A lack of understanding that the asset managers act as agents for their clients, not for their own account.  As Fidelity’s letter notes, “An adviser is hired to exercise investment control over client assets subject to certain restrictions, but the assets of a fund never become assets of the adviser nor are they commingled with assets of another fund. The adviser manages the fund’s assets but does not become financially responsible for them. Their performance cannot threaten its solvency the way the performance of proprietary assets of a bank or other subsidiary can threaten the solvency of a bank holding company. “
  • The lack of evidence that the bank-centric focus of FSOC regulation is applicable to the asset management industry.  The Financial Services Roundtable states that “Unlike persons who deposit funds in a bank account insured by the Federal Deposit Insurance Corporation, investors do not seek shelter from risk.  Rather, investors participate in capital market transactions . . . because they seek a certain level of risk and the opportunity to obtain the corresponding financial rewards of the risk-taking.”
  • A failure to consider whether current regulations, including those adopted following the financial crisis, are sufficient to address the issues presented by the asset management industry.  Mayer Brown states in its letters that “The OFR Report fails to fully acknowledge how the existing regulatory regimes control the risk purportedly posed by asset managers and managed products.”

The commenters expressed concern over a perceived lack of involvement in the Report by the SEC, and encouraged the SEC to become more involved given its expertise in regulating the asset management industry.  The Dechert letter requested that “The SEC should act to ensure that its extensive understanding and regulatory perspective in regard to the asset management industry is utilized to (a) correct the fundamental defects in the Report and (b) help the FSOC better understand asset management, any threats that may arise from it, any need for additional regulation, and the appropriate form of any such regulation.”

The comments are available here.