The Forum submitted a comment letter in response to the FSOC’s request for comment on the systemic risks posed by products and activities in the asset management industry. The Forum highlighted the relatively low levels of systemic risk posed by the asset management industry generally, and specifically the mutual fund industry. The Forum noted that restrictions on mutual funds, including those addressing leverage and liquidity distinguish the registered funds from other investment vehicles in the asset management space. The letter encouraged the FSOC to recognize the expertise of the SEC in regulating the asset management industry, as well as the current regulatory regime which protects mutual funds from systemic risk.
The 55 comments submitted in response to the request generally follow the same format, identifying features in the asset management industry that lessen systemic risk and suggesting that the FSOC should defer to the SEC. In its 98-page, data-rich response, the ICI argued that it had provided “ample evidence that regulated funds and their managers do not pose risks to financial stability.” The letter provided data on the performance of the asset management industry through periods of stress and thoroughly explained the operations of and regulations on the industry.
However, several commenters felt that further intervention by the FSOC is warranted. One comment letter argued that ETFs and ETNs (collectively “Exchange Traded Products” or “ETPs”) represented a systemic risk because the authors claimed that many of the funds face illiquidity, excessive short selling, and low asset levels. For support, the letter relied on data showing that 71 percent of exchange traded products had an average daily volume of less than 100,000 shares and 47 percent traded less than 20,000 shares on an average day. The letter further argued that 43 percent of ETPs have assets below a “commonly recognized asset level of sustainability.” The authors also examined leveraged and inverse ETFs, claiming that the products performed poorly during times of market stress, such as the flash crash, which demonstrated structural issues in the products.
Better Markets, “a nonprofit organization that promotes the public interest in the capital and commodity markets,” suggested that the FSOC should establish and fully explain its priorities and utilize “rigorous and data-driven” analysis. The organization also noted that the FSOC should again focus on money market funds because the SEC’s recent reforms were “incomplete and insufficient.” Better Markets recommended that the floating NAV requirement be applied to all money market funds, and that the fees and gates provisions should be replaced with a three-percent “minimum balance at risk,” the amount of which would only be available for redemption after 30 days.